FIRST CITIZENS BANCSHARES INC /DE/ - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________

FORM 10-Q

____________________________________________________


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended September 30, 2022
			or
☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-16715

First Citizens BancShares, Inc.

(Exact name of Registrant as specified in its charter)


Delaware			56-1528994
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)

4300 Six Forks Road	Raleigh	North Carolina	27609
(Address of principle executive offices)			(Zip code)

		(919)	716-7000
(Registrant’s telephone number, including area code)

____________________________________________________


Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, Par Value $1	FCNCA	Nasdaq Global Select Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A	FCNCP	Nasdaq Global Select Market
5.625% Non-Cumulative Perpetual Preferred Stock, Series C	FCNCO	Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
Class B Common Stock, Par Value $1

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and ‘emerging growth company’ in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Class A Common Stock— 13,498,535 shares

Class B Common Stock— 1,005,185 shares

(Number of shares outstanding, by class, as of October 31, 2022)

CONTENTS

Part One — Financial Information:

Item 1.

Financial Statements

Consolidated Balance Sheets (Unaudited)

Consolidated Statements of Income (Unaudited)

Consolidated Statements of Comprehensive Income (Unaudited)

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Consolidated Statements of Cash Flows (Unaudited)

Notes to the Unaudited Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

106

Item 4.

Controls and Procedures

107

Part Two — Other Information:

Item 1.

Item 1A.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 5.

Item 6.

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

The following is a list of certain abbreviations and acronyms we use throughout this document. You may find it helpful to refer back to this table. We also include a Glossary of Key Terms in Part 1, Item 2. Management’s Discussion and Analysis.


Acronym	Definition	Acronym	Definition
ACL	Allowance for Credit Losses	IRC	Internal Revenue Code
AOCI	Accumulated Other Comprehensive Income	ISDA	International Swaps and Derivative Association
ASC	Accounting Standards Codification	LIBOR	London Inter-Bank Offered Rate
ASU	Accounting Standards Update	LOCOM	Lower of the Cost or Market Value
BHC	Bank Holding Company	MD&A	Management’s Discussion and Analysis
BOLI	Bank Owned Life Insurance	MSRs	Mortgage Servicing Rights
bps	Basis point(s); 1 bp = 0.01%	NCCOB	North Carolina Commissioner of Banks
CAB	Community Association Banking	NII	Net Interest Income
CECL	Current Expected Credit Losses	NII Sensitivity	Net Interest Income Sensitivity
DPA	Deferred Purchase Agreement	NIM	Net Interest Margin
DTAs	Deferred Tax Assets	NSF	Nonsufficient Funds
ETR	Effective Tax Rate	OREO	Other Real Estate Owned
EVE Sensitivity	Economic Value of Equity Sensitivity	PAA	Purchase Accounting Adjustments
FASB	Financial Accounting Standards Board	PB	Primary Beneficiary
FCB	First-Citizens Bank & Trust Company	PCA	Prompt corrective action
FDIC	Federal Deposit Insurance Corporation	PCD	Purchased Credit Deteriorated
FHA	Federal Housing Administration	PD	Probability of Obligor Default
FHC	Financial Holding Company	ROU	Right of Use
FHLB	Federal Home Loan Bank	RSU	Restricted Stock Unit
FOMC	Federal Open Market Committee	SBA	Small Business Administration
FRB	Federal Reserve Bank	SBA-PPP	Small Business Administration Paycheck Protection Plan
GAAP	Accounting Principles Generally Accepted in the U.S.	SOFR	Secured Overnight Financing Rate
GDP	Gross Domestic Product	TDRs	Troubled Debt Restructuring
HAMP	Home Affordable Modification Program	UPB	Unpaid Principal Balance
HOA	Home Owner’s Association	VA	Veteran’s Administration
HQLS	High Quality Liquid Securities	VIE	Variable Interest Entity

PART I

Item 1. Financial Statements

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)


dollars in millions, except share data	September 30, 2022		December 31, 2021
Assets
Cash and due from banks	$	481	$	338
Interest-earning deposits at banks	6,172		9,115

Investments in marketable equity securities (cost of $73 million at September 30, 2022 and December 31, 2021)	92		98
Investment securities available for sale (cost of $10,083 million at September 30, 2022 and $9,215 million at December 31, 2021)	9,088		9,203
Investment securities held to maturity (fair value of $8,166 million at September 30, 2022 and $3,759 million at December 31, 2021)	9,661		3,809
Assets held for sale	21		99
Loans and leases	69,790		32,372
Allowance for credit losses	(882)		(178)
Loans and leases, net of allowance for credit losses	68,908		32,194
Operating lease equipment, net	7,984		—
Premises and equipment, net	1,410		1,233
Bank-owned life insurance	1,342		116
Goodwill	346		346
Other intangible assets	145		19
Other assets	3,660		1,739
Total assets	$	109,310	$	58,309
Liabilities
Deposits:
Noninterest-bearing	$	26,587	$	21,405
Interest-bearing	60,966		30,001
Total deposits	87,553		51,406
Credit balances of factoring clients	1,147		—
Borrowings:



Short-term borrowings	3,128		589




Long-term borrowings	5,215		1,195
Total borrowings	8,343		1,784
Other liabilities	2,434		381
Total liabilities	99,477		53,571
Stockholders’ equity
Preferred stock - $0.01 par value (10,000,000 shares authorized at September 30, 2022 and December 31, 2021)	881		340
Common stock:
Class A - $1 par value (16,000,000 shares authorized; 13,970,944 and 8,811,220 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively)	14		9
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at September 30, 2022 and December 31, 2021)	1		1
Additional paid in capital	4,506		—
Retained earnings	5,160		4,378
Accumulated other comprehensive (loss) income	(729)		10
Total stockholders’ equity	9,833		4,738
Total liabilities and stockholders’ equity	$	109,310	$	58,309

See accompanying Notes to the Unaudited Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
dollars in millions, except share and per share data	2022		2021		2022		2021
Interest income
Interest and fees on loans	$	785	$	320	$	2,061	$	967
Interest on investment securities	90		40		262		106
Interest on deposits at banks	31		3		50		7
Total interest income	906		363		2,373		1,080
Interest expense
Deposits	78		8		159		25
Borrowings	33		8		70		22
Total interest expense	111		16		229		47
Net interest income	795		347		2,144		1,033
Provision (benefit) for credit losses	60		(1)		566		(32)
Net interest income after provision for credit losses	735		348		1,578		1,065
Noninterest income
Rental income on operating leases	219		—		640		—
Fee income and other service charges	44		10		118		31
Wealth management services	35		32		107		96
Service charges on deposit accounts	21		26		77		69
Factoring commissions	24		—		78		—
Cardholder services, net	25		23		76		65
Merchant services, net	8		9		27		26
Insurance commissions	11		4		34		12
Realized gain on sale of investment securities available for sale, net	—		8		—		33
Fair value adjustment on marketable equity securities, net	(2)		3		(5)		31
Bank-owned life insurance	8		1		25		2
Gain on sale of leasing equipment, net	2		—		13		—
Gain on acquisition	—		—		431		—
Gain on extinguishment of debt	1		—		7		—
Other noninterest income	37		8		79		29
Total noninterest income	433		124		1,707		394
Noninterest expense
Depreciation on operating lease equipment	87		—		257		—
Maintenance and other operating lease expenses	52		—		142		—
Salaries and benefits	351		194		1,044		566
Net occupancy expense	47		29		144		87
Equipment expense	55		30		161		89
Professional fees	13		5		44		13
Third-party processing fees	27		16		77		44
FDIC insurance expense	5		3		26		10
Marketing	15		3		32		7
Merger-related expenses	33		7		202		20
Intangible asset amortization	5		3		17		9
Other noninterest expense	70		24		169		66
Total noninterest expense	760		314		2,315		911
Income before income taxes	408		158		970		548
Income tax expense	93		34		129		124
Net income	$	315	$	124	$	841	$	424
Preferred stock dividends	12		5		36		14
Net income available to common stockholders	$	303	$	119	$	805	$	410
Earnings per common share
Basic	$	19.27	$	12.17	$	50.76	$	41.79
Diluted	$	19.25	$	12.17	$	50.70	$	41.79
Weighted average common shares outstanding
Basic	15,711,976		9,816,405		15,849,219		9,816,405
Diluted	15,727,993		9,816,405		15,867,314		9,816,405

See accompanying Notes to the Unaudited Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
dollars in millions	2022		2021		2022		2021
Net income	$	315	$	124	$	841	$	424
Other comprehensive loss, net of tax
Net unrealized loss on securities available for sale	(266)		(15)		(747)		(59)
Net change in unrealized loss on securities available for sale transferred to securities held to maturity	—		(1)		1		(1)
Net change in pension obligations	2		6		7		16


Other comprehensive loss, net of tax	$	(264)	$	(10)	$	(739)	$	(44)
Total comprehensive income	$	51	$	114	$	102	$	380

See accompanying Notes to the Unaudited Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


	Three Months Ended September 30,
dollars in millions, except share data	Preferred Stock		Class A Common Stock		Class B Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Total Stockholders' Equity
Balance at June 30, 2022	$	881	$	15	$	1	$	5,345	$	4,865	$	(465)	$	10,642
Net income	—		—		—		—		315		—		315
Other comprehensive loss, net of tax	—		—		—		—		—		(264)		(264)






Stock based compensation	—		—		—		2		—		—		2
Repurchased 1,027,414 shares of Class A common stock	—		(1)		—		(841)		—		—		(842)
Cash dividends declared ($0.47 per common share):
Class A common stock	—		—		—		—		(7)		—		(7)
Class B common stock	—		—		—		—		(1)		—		(1)
Preferred stock dividends declared:
Series A	—		—		—		—		(5)		—		(5)
Series B	—		—		—		—		(5)		—		(5)
Series C	—		—		—		—		(2)		—		(2)
Balance at September 30, 2022	881		14		1		4,506		5,160		(729)		9,833

Balance at June 30, 2021	340		9		1		—		4,149		(22)		4,477
Net income	—		—		—		—		124		—		124
Other comprehensive income, net of tax	—		—		—		—		—		(10)		(10)
Cash dividends declared ($0.47 per common share):
Class A common stock	—		—		—		—		(4)		—		(4)
Class B common stock	—		—		—		—		—		—		—
Preferred stock dividends declared	—		—		—		—		(5)		—		(5)
Balance at September 30, 2021	$	340	$	9	$	1	$	—	$	4,264	$	(32)	$	4,582


	Nine Months Ended September 30,
dollars in millions, except share data	Preferred Stock		Class A Common Stock		Class B Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
Balance at December 31, 2021	$	340	$	9	$	1	$	—	$	4,378	$	10	$	4,738
Net income	—		—		—		—		841		—		841
Other comprehensive loss, net of tax	—		—		—		—		—		(739)		(739)
Issued in CIT Merger:
Common stock	—		6		—		5,273		—		—		5,279
Series B preferred stock	334		—		—		—		—		—		334
Series C preferred stock	207		—		—		—		—		—		207


Stock based compensation	—		—		—		74		—		—		74
Repurchased 1,027,414 shares of Class A common stock	—		(1)		—		(841)		—		—		(842)
Cash dividends declared ($0.47 per common share):
Class A common stock	—		—		—		—		(21)		—		(21)
Class B common stock	—		—		—		—		(2)		—		(2)
Preferred stock dividends declared:
Series A	—		—		—		—		(14)		—		(14)
Series B	—		—		—		—		(14)		—		(14)
Series C	—		—		—		—		(8)		—		(8)
Balance at September 30, 2022	881		14		1		4,506		5,160		(729)		9,833

Balance at December 31, 2020	340		9		1		—		3,867		12		4,229
Net income	—		—		—		—		424		—		424
Other comprehensive loss, net of tax	—		—		—		—		—		(44)		(44)
Cash dividends declared ($0.47 per common share):
Class A common stock	—		—		—		—		(12)		—		(12)
Class B common stock	—		—		—		—		(1)		—		(1)
Preferred stock dividends declared	—		—		—		—		(14)		—		(14)
Balance at September 30, 2021	$	340	$	9	$	1	$	—	$	4,264	$	(32)	$	4,582

See accompanying Notes to the Unaudited Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,
dollars in millions	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	841	$	424
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Provision (benefit) for credit losses	566		(32)
Deferred tax expense	80		9
Depreciation, amortization, and accretion, net	399		102
Stock based compensation expense	17		—
Realized gain on sales of investment securities available for sale, net	—		(33)
Fair value adjustment on marketable equity securities, net	5		(31)
Gain on sale of loans, net	(16)		(27)
Gain on sale of operating lease equipment, net	(10)		—
Loss on sale of premises and equipment, net	1		—
Gain on other real estate owned, net	(13)		(3)
Gain on acquisition	(431)		—

Gain on extinguishment of debt	(7)		—
Origination of loans held for sale	(320)		(861)
Proceeds from sale of loans held for sale	388		808
Net change in other assets	84		(747)
Net change in other liabilities	216		(11)
Other operating activities	(29)		(9)
Net cash provided by (used in) operating activities	1,771		(411)
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in interest-earning deposits at banks	5,817		(5,528)
Purchases of marketable equity securities	—		(2)
Proceeds from sales of investments in marketable equity securities	—		1
Purchases of investment securities available for sale	(1,813)		(3,621)
Proceeds from maturities of investment securities available for sale	927		1,968
Proceeds from sales of investment securities available for sale	—		1,367
Purchases of investment securities held to maturity	—		(1,199)
Proceeds from maturities of investment securities held to maturity	699		606

Net change in loans	(4,648)		275
Proceeds from sales of loans	173		—
Purchases of operating lease equipment	(464)		—
Proceeds from sales of operating lease equipment	58		—
Purchases of premises and equipment	(81)		(72)
Proceeds from sales of premises and equipment	13		1

Proceeds from sales of other real estate owned	38		30
Acquisition, net of cash acquired	134		—
Other investing activities	(67)		(35)
Net cash provided by (used in) investing activities	786		(6,209)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in time deposits	(1,741)		(314)
Net change in demand and other interest-bearing deposits	(1,831)		6,949
Net change in securities sold under customer repurchase agreements	(11)		22
Repayment of short-term borrowings	(450)		—
Proceeds from issuance of short-term borrowings	3,000		—
Repayment of long-term borrowings	(3,740)		(29)
Proceeds from issuance of long-term borrowings	3,253		—


Repurchase of Class A common stock	(792)		—
Cash dividends paid	(58)		(32)
Other financing activities	(44)		—
Net cash (used in) provided by financing activities	(2,414)		6,596

Change in cash and due from banks	143		(24)
Cash and due from banks at beginning of period	338		362
Cash and due from banks at end of period	$	481	$	338


	Nine Months Ended September 30,
dollars in millions	2022		2021
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (refunded) during the period for:
Interest	$	315	$	49
Income taxes	(12)		871
Significant non-cash investing and financing activities:
Transfers of loans to other real estate	13		8
Transfers of premises and equipment to other real estate	18		9

Dividends declared but not paid	1		—
Transfer of assets from held for investment to held for sale	98		73
Transfer of assets from held for sale to held for investment	19		2
Loans held for sale exchanged for investment securities	38		177
Commitments extended during the period on affordable housing investment credits	55		15
Issuance of common stock as consideration for acquisition	5,279		—
Stock based compensation as consideration for acquisition	81		—
Issuance of preferred stock as consideration for acquisition	541		—

See accompanying Notes to the Unaudited Consolidated Financial Statements.

Notes to the Unaudited Consolidated Financial Statements

NOTE 1 — ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Nature of Operations

First Citizens BancShares, Inc. (the “Parent Company” and, when including all of its subsidiaries on a consolidated basis, “we,” “us,” “our,” “BancShares”) is a financial holding company organized under the laws of Delaware that conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (“FCB,” or the “Bank”), which is headquartered in Raleigh, North Carolina. BancShares and its subsidiaries operate more than 550 branches in 22 states, predominantly located in the Southeast, Mid-Atlantic, Midwest and Western United States.

BASIS OF PRESENTATION

Principles of Consolidation and Basis of Presentation

These consolidated financial statements and notes thereto are presented in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and consolidated results of operations have been made. The unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in BancShares’ Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

The consolidated financial statements of BancShares include the accounts of BancShares and its subsidiaries, certain partnership interests and variable interest entities (“VIEs”) where BancShares is the primary beneficiary (“PB”), if applicable. Assets held in agency or fiduciary capacity are not included in the consolidated financial statements.

Reclassifications

In certain instances, amounts reported in the 2021 consolidated financial statements have been reclassified to conform to the current financial statement presentation, primarily driven by impacts from the CIT Merger, as defined below. Such reclassifications had no effect on previously reported stockholders’ equity or net income.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions impacting the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. BancShares considers the allowance for credit losses (“ACL”) to be a significant estimate.

Business Combinations

BancShares accounts for all business combinations using the acquisition method of accounting. Under this method, acquired assets and assumed liabilities are included with the acquirer’s accounts at their estimated fair value as of the date of acquisition, with any excess of purchase price over the fair value of the net assets acquired recognized as either finite lived intangibles or capitalized as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceeds the purchase price, a gain on acquisition is recognized. Acquisition-related and restructuring costs are recognized as period expenses as incurred.

On January 3, 2022, BancShares completed its previously announced merger (the “CIT Merger”) with CIT Group Inc. (“CIT”), pursuant to an Agreement and Plan of Merger, dated as of October 15, 2020, as amended by Amendment No. 1, dated as of September 30, 2021 (as amended, the “Merger Agreement”). Results as of and for the three and nine months ended September 30, 2022 include activity of the combined entity. See Note 2 — Business Combinations for additional information.

ACCOUNTING POLICIES

Significant accounting policies are described in the 2021 Form 10-K. We have further described relevant updates to the significant accounting policies presented below.

Reportable Segments

Loans and Leases

Loan Classes

We re-evaluated our loan classes to reflect the characteristics of BancShares’ portfolio. The changes to the loan classes primarily include: (i) reclassifying Small Business Administration Paycheck Protection Program (“SBA-PPP”) loans into the commercial and industrial class, (ii) identifying a separate loan class for leases, and (iii) purchased credit deteriorated (“PCD”) loans are no longer a separate loan class. The following represent our classes of loans as of September 30, 2022. Prior period disclosures have been conformed to the current presentation.

Commercial Loans and Leases

Commercial Construction - Commercial construction consists of loans to finance land for commercial development of real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.

Owner Occupied Commercial Mortgage - Owner occupied commercial mortgage consists of loans to purchase or refinance owner occupied nonresidential properties. This includes office buildings, other commercial facilities and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

Non-owner Occupied Commercial Mortgage - Non-owner occupied commercial mortgage consists of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

Commercial and Industrial - Commercial and industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, and business credit cards. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan.

Factoring - We provide factoring, receivable management, and secured financing to businesses (our clients, who are generally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e., sold or assigned to the factor). The most prevalent risk in factoring transactions is customer credit risk, which relates to the financial inability of a customer to pay undisputed factored trade accounts receivable. Factoring receivables are primarily included in the commercial and industrial loan class.

Leases – Leases consists of finance lease arrangements for technology and office equipment and large and small industrial, medical, and transportation equipment.

Consumer Loans

Residential Mortgage - Consumer mortgage consists of loans to purchase, construct, or refinance the borrower’s primary dwelling, secondary residence or vacation home and are often secured by 1-4 family residential properties or undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. Delays in construction and development projects can cause cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.

Revolving Mortgage - Revolving mortgage consists of home equity lines of credit and other lines of credit or loans secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior liens as a substantial decline in value could render the junior lien position effectively unsecured.

Consumer Auto - Consumer auto loans consist of installment loans to finance purchases of vehicles. These loans include direct auto loans originated in bank branches, as well as indirect auto loans originated through agreements with auto dealerships. The value of the underlying collateral within this class is at risk of potential rapid depreciation, which could result in unpaid balances in excess of the collateral.

Consumer Other - Other consumer loans consist of loans to finance unsecured home improvements, student loans, and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation, which could result in unpaid balances in excess of the collateral.

Assets Held for Sale

Assets held for sale at September 30, 2022 primarily consist of residential mortgage loans held for sale of $7 million carried at fair value and commercial loans held for sale of $11 million carried at the lower of the cost or fair market value less disposal costs (“LOCOM”). The remainder related to operating lease equipment held for sale.

Goodwill

BancShares applied the acquisition method of accounting for the CIT Merger. The fair value of the net assets acquired exceeded the purchase price. Consequently, there was a gain on acquisition (and no goodwill) related to the CIT Merger as discussed further in Note 2 — Business Combinations. BancShares had goodwill of $346 million at September 30, 2022 and December 31, 2021. The entire balance of goodwill relates to business combinations that BancShares completed prior to the CIT Merger. All of the goodwill relates to the General Banking reporting unit. There was no goodwill impairment during the three or nine month periods ended September 30, 2022. Goodwill and other intangibles are discussed further in Note 7 — Goodwill and Other Intangibles.

Derivative Financial Instruments

BancShares did not have any significant derivative financial instruments prior to completion of the CIT Merger. However, BancShares acquired various derivative financial instruments in connection with the CIT Merger as further described in Note 13 — Derivative Financial Instruments. BancShares manages economic risk and exposure to interest rate and foreign currency risk through derivative transactions in over-the-counter markets with other financial institutions. BancShares also offers derivative products to its customers in order for them to manage their interest rate and currency risks. BancShares does not enter into derivative financial instruments for speculative purposes.

Derivatives utilized by BancShares may include swaps, forward settlement contracts and options contracts. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date, and rate or price. An option contract is an agreement that gives the buyer the right, but not the obligation, to buy or sell an underlying asset from or to another party at a predetermined price or rate over a specific period of time.

BancShares documents, at inception, all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking various hedges. Upon executing a derivative contract, BancShares designates the derivative as either a qualifying hedge or non-qualifying hedge. The designation may change based upon management’s reassessment of circumstances. BancShares does not have any qualifying fair value, cash flow or net investment hedges as of September 30, 2022.

BancShares provides interest rate derivative contracts to support the business requirements of its customers. The derivative contracts include interest rate swap agreements and interest rate cap and floor agreements wherein BancShares acts as a seller of these derivative contracts to its customers. To mitigate the market risk associated with these customer derivatives, BancShares enters into similar offsetting positions with broker-dealers.

BancShares has both bought and sold credit protection in the form of participations in interest rate swaps (risk participations). These risk participations were entered into in the ordinary course of business to facilitate customer credit needs. Swap participations where BancShares has sold credit protection have maturities ranging between 2022 and 2040 and may require BancShares to make payment to the counterparty if the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction.

BancShares uses foreign currency forward contracts, interest rate swaps, and options to hedge interest rate and foreign currency risks arising from its asset and liability mix. These are treated as economic hedges.

All derivative instruments are recorded at their respective fair value. BancShares reports all derivatives on a gross basis in the Consolidated Balance Sheets and does not offset derivative assets and liabilities and cash collateral under master netting agreements except for swap contracts cleared by the Chicago Mercantile Exchange and LCH Clearnet. These swap contracts are accounted as “settled-to-market” and cash variation margin paid or received is characterized as settlement of the derivative exposure and variation margin balances are offset against the corresponding derivative asset and liability balances on the balance sheet. Nonqualifying hedges are presented in the Consolidated Balance Sheets in other assets or other liabilities, but with their resulting gains or losses recognized in other noninterest income. For non-qualifying derivatives with periodic interest settlements, BancShares reports such settlements with other changes in fair value in other noninterest income.

Fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Valuations of derivative assets and liabilities reflect the value of the instrument including BancShares’ and the counterparty’s credit risk.

BancShares is exposed to credit risk to the extent that the counterparty fails to perform under the terms of a derivative agreement. Losses related to credit risk are reflected in other noninterest income. BancShares manages this credit risk by requiring that all derivative transactions entered into as hedges be conducted with counterparties rated investment grade at the initial transaction by nationally recognized rating agencies, and by setting limits on the exposure with any individual counterparty. In addition, pursuant to the terms of the Credit Support Annexes between BancShares and its counterparties, BancShares may be required to post collateral or may be entitled to receive collateral in the form of cash or highly liquid securities depending on the valuation of the derivative instruments as measured on a daily basis. Derivatives are discussed further in Note 13 — Derivative Financial Instruments.

Bank-Owned Life Insurance (“BOLI”)

Banks can purchase life insurance policies on the lives of certain officers and employees and are the owner and beneficiary of the policies. These policies, known as BOLI, offset the cost of providing employee benefits. BancShares had BOLI of $1.3 billion and $116 million at September 30, 2022 and December 31, 2021, respectively. BancShares acquired BOLI of $1.2 billion in the CIT Merger. BancShares records BOLI as a separate line item in the Consolidated Balance Sheets at each policy’s respective cash surrender value, with changes recorded as noninterest income in the Consolidated Statements of Income.

Impairment of Operating Lease Equipment

BancShares did not have significant amounts of equipment related to operating leases prior to completion of the CIT Merger. At September 30, 2022, BancShares has operating lease equipment of approximately $8.0 billion, primarily related to the Rail segment. A review for impairment of long-lived assets, such as operating lease equipment, is performed at least annually or when events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Impairment of long-lived assets is determined by comparing the carrying amount to future undiscounted net cash flows expected to be generated. If a long-lived asset is impaired, the impairment is the amount by which the carrying amount exceeds the fair value of the long-lived asset. Fair value is based upon discounted cash flow analysis and available market data. Current lease rentals, as well as relevant and available market information (including third party sales for similar equipment and published appraisal data), are considered both in determining undiscounted future cash flows when testing for the existence of impairment and in determining estimated fair value in measuring impairment. Depreciation expense is adjusted when the projected fair value is below the projected book value at the end of the depreciable life. Assets to be disposed of are included in assets held for sale in the Consolidated Balance Sheets and are reported at LOCOM.

Stock-Based Compensation

BancShares did not have stock-based compensation awards prior to completion of the CIT Merger. Certain CIT employees received grants of restricted stock unit awards (“CIT RSUs”) or performance stock unit awards (“CIT PSUs”). Upon completion of the CIT Merger and pursuant to the terms of the Merger Agreement, (i) the CIT RSUs and PSUs converted into “BancShares RSUs” based on the 0.062 exchange ratio (the “Exchange Ratio”) and (ii) the BancShares RSUs became subject to the same terms and conditions (including vesting terms, payment timing and rights to receive dividend equivalents) applicable to the CIT RSUs and CIT PSUs, except that vesting for the converted CIT PSUs was no longer subject to any performance goals or metrics. Upon completion of the CIT Merger, the fair value of the BancShares RSUs was determined based on the closing share price of the Parent Company’s Class A Common Stock (the “Class A Common Stock”) on January 3, 2022. The fair value of the BancShares RSUs is (i) included in the purchase price consideration for the portion related to employee services provided prior to completion of the CIT Merger and (ii) recognized in expenses for the portion related to employee services to be provided after completion of the CIT Merger. For “graded vesting” awards, each vesting tranche of the award is amortized separately as if each were a separate award. For “cliff vesting” awards, compensation expense is recognized over the requisite service period. BancShares recognizes the effect of forfeitures in compensation expense when they occur. In the event of involuntary termination of employees after the Merger Date, vesting occurs on the employee termination date for BancShares RSUs subject to change in control provisions. Expenses related to stock-based compensation are included in merger-related expenses in the Consolidated Statements of Income. Stock-based compensation is discussed further in Note 21 — Employee Benefit Plans.

Members of the CIT Board of Directors had RSU awards, stock settled annual awards, and deferred stock-settled annual awards (collectively, the “CIT Director Equity Awards”), which vested immediately upon the completion of the CIT Merger. The fair value of the CIT Director Equity Awards was determined based on the Exchange Ratio and the closing share price of the Class A Common Stock on January 3, 2022, and was included in the purchase price consideration disclosed in Note 2 — Business Combinations.

Per Share Data

Earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of Class A Common Stock and Class B Common Stock outstanding during each period. Diluted earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding increased by the weighted-average potential impact of dilutive shares. BancShares’ potential dilutive instruments include unvested RSUs assumed in the CIT Merger. The dilutive effect is computed using the treasury stock method, which assumes the conversion of these instruments. However, in periods when there is a net loss, these shares would not be included in the diluted earnings per common share computation as the result would have an anti-dilutive effect. BancShares had no potential dilutive common shares outstanding prior to the CIT Merger and did not report diluted earnings per common share for prior periods.

Defined Benefit Pension Plans and Other Postretirement Benefits

As disclosed in the 2021 Form 10-K, BancShares has both funded and unfunded noncontributory defined benefit pension and postretirement plans covering certain employees, each of which is designed in accordance with the practices and regulations in the related countries. In conjunction with the CIT Merger, BancShares assumed the funded and unfunded noncontributory defined benefit pension and postretirement plans of CIT. See Note 21 — Employee Benefit Plans for disclosures related to the plans.

Revenue Recognition and Noninterest Income

Descriptions of significant noninterest revenue-generating activities new to BancShares due to the CIT Merger are as follows:

Rental income on operating leases is recognized on a straight-line basis over the lease term for lease contract fixed payments and is included in noninterest income. Rental income also includes variable lease income which is recognized as earned. The accrual of rental income on operating leases is suspended when the collection of substantially all rental payments is no longer probable and rental income for such leases is recognized when cash payments are received. In the period we conclude that collection of rental payments is no longer probable, accrued but uncollected rental revenue is reversed against rental income.

Factoring commissions, which are earned in the Commercial Banking segment, are driven by factoring volumes, principally in the retail sectors. Factoring commissions are charged as a percentage of the invoice amount of the receivables assigned to BancShares. The volume of factoring activity and the commission rates charged impact factoring commission income earned. Factoring commissions are deferred and recognized as income over time based on the underlying terms of the assigned receivables. See Commercial Loans and Leases section for additional commentary on factoring.

Gains on leasing equipment are recognized upon completion of sale (sale closing) and transfer of title. The gain is determined based on sales price less book carrying value (net of accumulated depreciation).

BOLI income reflects income earned on changes in the cash surrender value of the BOLI.

Other Newly Adopted Accounting Standards

The following pronouncements or Accounting Standards Updates (“ASUs”) were issued by the Financial Accounting Standards Board (“FASB”) and adopted by BancShares as of January 1, 2022:

ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity - Issued August 2020

The amendments in this ASU reduce the number of models used to account for convertible instruments, amend diluted earnings per share calculations for convertible instruments, amend the requirements for a contract (or embedded derivative) that is potentially settled in an entity’s own shares to be classified in equity, and expand disclosure requirements for convertible instruments. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares does not have any convertible instruments within the scope of this ASU.

ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options - Issued May 2021

The amendments in this ASU clarify an issuer's accounting for certain modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The ASU requires that such modifications or exchanges be treated as an exchange of the original instrument for a new instrument. An issuer should measure the effect of such modifications or exchanges based on analysis of the difference between the fair value of the modified instrument and the fair value of that instrument immediately before modification or exchange. Recognition of a modification or an exchange of a freestanding equity-classified written call option is then based upon the substance of the transaction. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares currently does not have any freestanding equity-classified written call options within the scope of this ASU.

ASU 2021-05, Leases, (Topic 842), Lessors - Certain Leases with Variable Lease Payments - Issued July 2021

The amendments in this ASU improve lessor accounting for certain leases with variable lease payments so that lessors are no longer required to recognize a day-one selling loss upon lease commencement when specified criteria are met. Specifically, this ASU requires a lessor to classify a lease with variable payments that do not depend on a reference index or a rate as an operating lease if classifying the lease as a sales-type lease or a direct financing lease would result in the recognition of a day-one selling loss at lease commencement. A day-one selling loss is not recognized under operating lease accounting. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares has not originated finance leases which required a day-one selling loss at lease commencement.

NOTE 2 — BUSINESS COMBINATIONS

CIT Group Inc.

BancShares completed the CIT Merger on January 3, 2022 (the “Merger Date”). Pursuant to the Merger Agreement, each share of CIT common stock, par value $0.01 per share (“CIT Common Stock”), issued and outstanding, except for certain shares of CIT Common Stock owned by CIT or BancShares, was converted into the right to receive 0.062 shares of Class A Common Stock, par value $1.00 per share, plus cash in lieu of fractional shares of Class A Common Stock. The Parent Company issued approximately 6.1 million shares of Class A Common Stock in connection with the consummation of the CIT Merger. The closing share price of Class A Common Stock on the Nasdaq Global Select Market was $859.76 on January 3, 2022. The purchase price consideration related to the issuance of Class A Common Stock was $5.3 billion. There were approximately 8,800 fractional shares for which the Parent Company paid cash of $7 million.

Pursuant to the terms of the Merger Agreement, each issued and outstanding share of fixed-to-floating rate non-cumulative perpetual preferred stock, series A, par value $0.01 per share, of CIT (“CIT Series A Preferred Stock”) and each issued and outstanding share of 5.625% non-cumulative perpetual preferred stock, series B, par value $0.01 per share, of CIT (“CIT Series B Preferred Stock” and together with CIT Series A Preferred Stock, “CIT Preferred Stock”), converted into the right to receive one share of a newly created series of preferred stock, series B, of the Parent Company (“BancShares Series B Preferred Stock”) and one share of a newly created series of preferred stock, series C, of the Parent Company (“BancShares Series C Preferred Stock” and together with the BancShares Series B Preferred Stock, the “New BancShares Preferred Stock”), respectively, having such rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, that are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, of the CIT Series A Preferred Stock and the CIT Series B Preferred Stock, respectively. The non-callable period for the New BancShares Preferred Stock is January 4, 2027, which is five years from the original issuance date of the New BancShares Preferred Stock. There are 325,000 shares of BancShares Series B Preferred Stock with a liquidation preference of $1,000 per share, resulting in a total liquidation preference of $325 million. There are 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of $25 per share, resulting in a total liquidation preference of $200 million. The New BancShares Preferred Stock qualifies as Tier 1 capital. The purchase price consideration related to the fair value of the New BancShares Preferred Stock was $541 million.

CIT RSUs and PSUs converted to BancShares RSUs and CIT Director Awards and immediately vested upon completion of the CIT Merger as further described in the “Stock-Based Compensation” discussion in Note 1 — Accounting Policies and Basis of Presentation. The aggregate purchase price consideration related to these compensation awards was $81 million.

The CIT Merger has been accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values based on initial valuations as of January 3, 2022. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the merger and other future events that are highly subjective in nature and may require adjustments.

As of September 30, 2022, certain fair value measurements remain preliminary. The purchase price allocation is considered preliminary related to loan and lease portfolios, operating lease equipment, and deposits, as we identify and assess information regarding the nature of these assets and liabilities and review the associated valuation assumptions and methodologies. The amounts recorded for current and deferred tax assets and liabilities are considered provisional as we continue to evaluate the nature and extent of permanent and temporary differences between the book and tax bases of the acquired assets and liabilities assumed.

While BancShares believes that the information available on January 3, 2022 provided a reasonable basis for estimating fair value, as mentioned above, BancShares continues to review information relating to events or circumstances existing at the Merger Date. Purchase accounting could change until management finalizes its analysis of the acquired assets and assumed liabilities, up to one year from the Merger Date.

The following table provides a preliminary purchase price allocation to the identifiable assets acquired and liabilities assumed at their estimated fair values as of the Merger Date:

Purchase Price Consideration and Net Assets Acquired


dollars in millions, except shares issued and price per share	Purchase Price Allocation
Common share consideration
Shares of Class A Common Stock issued	6,140,010
Price per share on January 3, 2022	$	859.76
Common stock consideration	$	5,279
Preferred stock consideration	541
Stock-based compensation consideration	81
Cash in lieu of fractional shares and other consideration paid	51
Purchase price consideration	$	5,952
Assets
Cash and interest-earning deposits at banks	$	3,060
Investment securities	6,561
Assets held for sale	59
Loans and leases	32,714
Operating lease equipment	7,838
Bank-owned life insurance	1,202
Intangible assets	143
Other assets	2,198
Total assets acquired	$	53,775
Liabilities
Deposits	$	39,428
Borrowings	4,536
Credit balances of factoring clients	1,534
Other liabilities	1,894
Total liabilities assumed	$	47,392
Fair value of net assets acquired	6,383
Preliminary gain on acquisition	$	431

BancShares recorded a preliminary gain on acquisition of $431 million in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price. The preliminary gain on acquisition is not taxable.

The following is a description of the methods used to determine the estimated fair values of significant assets acquired and liabilities assumed as presented above.

Cash and interest-bearing deposits

For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value.

Investment securities

Fair values for investment securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models and/or discounted cash flows methodologies.

Loans held for sale and portfolio loans

Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, credit quality ratings or scores, amortization status and current discount rate. Selected larger, impaired loans were specifically reviewed to evaluate credit risk. Loans with similar risk characteristics were pooled together when applying various valuation techniques. The discount rates used for loans were based on an evaluation of current market rates for new originations of comparable loans and required rates of return for market participants to purchase similar assets, including adjustments for liquidity and credit quality when necessary.

Purchased loans and leases which reflect a more than insignificant credit deterioration since origination as of the date of acquisition are classified as PCD loans and leases. PCD loans and leases are recorded at acquisition-date amortized cost, which is the purchase price or fair value in a business combination, plus BancShares' initial ACL which results in a gross up of the loan balance (the “PCD Gross-Up”). The difference between the unpaid principal balance (“UPB”) and the acquisition date amortized cost resulting from the PCD Gross-Up is amortized or accreted to interest income over the contractual life of the loan using the effective interest method.

Non-Purchased Credit Deteriorated (“Non-PCD”) loans and leases consist of loans that do not reflect more than insignificant credit deterioration since origination at acquisition.

The following table presents the UPB and fair value of the loans and leases acquired by BancShares in the CIT Merger. The UPB for PCD loans and leases includes the PCD Gross-Up of $272 million as discussed further in Note 4 — Loans and Leases.

Loans Acquired


dollars in millions	Loans and Leases
	UPB		Fair Value

Non-PCD loans and leases	$	29,542	$	29,481
PCD loans and leases	3,550		3,233
Total loans and leases	$	33,092	$	32,714

Operating Lease Equipment

Operating lease equipment were comprised of two sub-groups: rail and non-rail equipment. Fair values for both were based on the cost approach where market values were not available. The sales approach was used to value rail assets where market information was available, or when replacement cost less depreciation was lower than the current market value. An intangible liability was recorded for net below market lease contracts rental rates, for which fair value was estimated using the income approach and market lease rates and other key inputs.

A discount was recorded for operating lease equipment, which includes railcars, locomotives and other equipment, to reduce it to fair value. This adjustment will reduce depreciation expense over the remaining useful lives of the equipment on a straight-line basis. The intangible liability (see Note 7 — Goodwill and Other Intangibles) will be amortized, thereby increasing rental income (a component of noninterest income) over the remaining term of the lease agreements on a straight-line basis.

Bank Owned Life Insurance

The fair values of BOLI policies were determined by the policy administrator and calculated based on the net present value of investment cash flows. Expected premium payments, death benefits and expected mortality were considered in the net present value calculation. Based upon the administrator’s analysis and management’s review of the analysis, fair value was determined to equate to book value as of the merger date.

Intangible assets

The following table presents the intangible asset recorded in conjunction with the CIT Merger related to the valuation of core deposits:

Intangible Assets

dollars in millions

Fair Value

Estimated Useful Life

Amortization Method

Core deposit intangibles

$143

10 years

Straight-line

Certain core deposits were acquired as part of the CIT Merger, which provide an additional source of funds for BancShares. The core deposit intangibles represent the costs saved by BancShares by acquiring the core deposits rather than sourcing the funds elsewhere. This intangible was valued using the income approach, after-tax cost savings method. This method estimates the fair value by discounting to present value the favorable funding spread attributable to the core deposit balances over their estimated average remaining life. The favorable funding spread is calculated as the difference in the alternative cost of funds and the net deposit cost. Refer to Note 7 — Goodwill and Other Intangibles for further discussion.

Other assets

The following table details other assets acquired:

Other Assets


dollars in millions	Fair Value
Low-income housing tax credits and other investments	$	777
Right of use assets	327
Premises and equipment	230
Fair value of derivative financial instruments	209
Counterparty receivables	133
Other	522
Total other assets	$	2,198

The fair values of the tax credit investments considered the ongoing equity installments that are regularly allocated to each of the underlying tax credit funds comprising the low-income housing tax credits investments, along with changes to projected tax benefits and the impact this has on future capital contributions, and an appropriately determined discount rate. The fair value of the investments in unconsolidated entities was valued using the income approach.

The right of use asset associated with real estate operating leases were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms. The lease liability was measured at the present value of the remaining lease payments, as if the acquired lease were a new lease of the acquirer at the acquisition date and using BancShares incremental borrowing rate. The lease term was determined for individual leases based on management’s assessment of the probability of exercising the existing renewal, termination and/or purchase option.

Fair values for property, including leasehold improvements, furniture and fixtures, computer software and other digital equipment were determined using the cost approach. Certain tangible assets that are expected to be sold in the short term were reported at net book. Real estate property, such as land and buildings, was valued using the sales comparison approach, where sales of comparable properties are adjusted for differences to estimate the value of each subject property.

The fair values of the derivative financial instruments, as well as counterparty receivables, were valued using prices of financial instruments with similar characteristics and observable inputs.

Deposits

The fair values for time deposits were estimated using a discounted cash flow analysis whereby the contractual remaining cash flows were discounted using market rates currently being offered for time deposits of similar maturities. For transactional deposits, carrying amounts approximate fair value.

Borrowings

In connection with the CIT Merger, BancShares assumed the outstanding borrowings of CIT. The fair values of borrowing were estimated based on readily observable prices using reliable market sources.

Credit balances of Factoring Clients

Credit balance amounts represent short-term payables that are tied to the factoring receivables. Due to the short-term nature of these payables and given that amounts are settled at book value, it was determined that the carrying value is equivalent to fair value.

Other Liabilities

Other liabilities include items such as accounts payable and accrued liabilities, lease liabilities, current and deferred taxes, commitments to fund tax credit investments and other miscellaneous liabilities. The fair value of lease liabilities was measured using the present value of remaining lease payments, using BancShares’ discount rate at the merger date. The fair value of the remaining liabilities was determined to approximate book value. For all accrued liabilities and accounts payable, it was determined that the carrying value equals book value.

Unaudited Pro Forma Information

The amount of interest income, noninterest income and net income of $1,199 million, $920 million and $461 million, respectively, attributable to the acquisition of CIT were included in BancShares’ Consolidated Statement of Income for the nine months ended September 30, 2022. CIT’s interest income, noninterest income and net income noted above reflect management’s best estimates, based on information available at the reporting date.

The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the three and nine months ended September 30, 2022 and 2021 as if CIT had been acquired on January 1, 2021. The unaudited estimated pro forma information combines the historical results of CIT with the BancShares’ consolidated historical results and includes certain adjustments for the respective periods. The following key adjustments were made to reflect the pro forma results as if the CIT Merger was completed on January 1, 2021: (i) provision for credit losses of $513 million related to the Non-PCD loans and leases and unfunded commitments (increased nine months ended September 30, 2022 to reflect the expense in 2021); (ii) merger and integration costs of $33 million and $202 million for the three and nine months ended September 30, 2022 (increased the 2022 periods to reflect the expense in the 2021 periods), respectively; (iii) estimated purchase accounting adjustment (“PAA”) accretion and amortization related to fair value adjustments and intangibles associated with the CIT Merger (net reduction to 2021); and (iv) $431 million preliminary gain on acquisition (decreased nine months ended September 30, 2022 to reflect the gain in 2021). BancShares expects to achieve operating cost savings and other business synergies as a result of the acquisition that are not reflected in the pro forma amounts that follow. The pro forma information should not be relied upon as being indicative of the historical results of operations that would have occurred had the acquisition taken place on January 1, 2021. Actual results may differ from the unaudited pro forma information presented below and the differences could be significant.

Selected Unaudited Pro Forma Financial Information for Consolidated BancShares


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest income	$	906	$	714	$	2,373	$	2,152
Noninterest income	433		515		1,276		2,014
Net income	338		340		955		1,112

NOTE 3 — INVESTMENT SECURITIES

The following tables as of September 30, 2022 include the investment security balances acquired in the CIT Merger, which were recorded at fair value on the acquisition date. The amortized cost and fair value of investment securities at September 30, 2022 and December 31, 2021, were as follows:

Amortized Cost and Fair Value - Debt Securities


dollars in millions	September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale
U.S. Treasury	$	2,047	$	—	$	(147)	$	1,900
Government agency	175		—		(2)		173
Residential mortgage-backed securities	5,450		—		(666)		4,784
Commercial mortgage-backed securities	1,828		—		(155)		1,673
Corporate bonds	583		—		(25)		558

Total investment securities available for sale	$	10,083	$	—	$	(995)	$	9,088
Investment in marketable equity securities	$	73	$	20	$	(1)	$	92
Investment securities held to maturity
U.S. Treasury	$	473	$	—	$	(54)	$	419
Government agency	1,546		—		(196)		1,350
Residential mortgage-backed securities	4,510		—		(765)		3,745
Commercial mortgage-backed securities	2,834		—		(437)		2,397
Supranational securities	295		—		(43)		252
Other	3		—		—		3
Total investment securities held to maturity	$	9,661	$	—	$	(1,495)	$	8,166
Total investment securities	$	19,817	$	20	$	(2,491)	$	17,346

	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale
U.S. Treasury	$	2,007	$	—	$	(2)	$	2,005
Government agency	221		1		(1)		221
Residential mortgage-backed securities	4,757		8		(36)		4,729
Commercial mortgage-backed securities	1,648		9		(17)		1,640
Corporate bonds	582		27		(1)		608

Total investment securities available for sale	$	9,215	$	45	$	(57)	$	9,203
Investment in marketable equity securities	$	73	$	25	$	—	$	98
Investment securities held to maturity
Residential mortgage-backed securities	$	2,322	$	6	$	(22)	$	2,306
Commercial mortgage-backed securities	1,485		—		(34)		1,451
Other	2		—		—		2
Total investment securities held to maturity	$	3,809	$	6	$	(56)	$	3,759
Total investment securities	$	13,097	$	76	$	(113)	$	13,060

Investments in mortgage-backed securities represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. U.S. Treasury investments represents T-bills and Notes issued by the U.S. Treasury. Investments in government agency securities represent securities issued by the Small Business Association (“SBA”), Federal Home Loan Bank (“FHLB”) and other agencies. Investments in supranational securities represent securities issued by the World Bank. Investments in corporate bonds represent positions in debt securities of other financial institutions. Investments in marketable equity securities represent positions in common stock of publicly traded financial institutions. Other held to maturity investments include certificates of deposit with other financial institutions.

BancShares also holds approximately 354,000 shares of Class B common stock of Visa, Inc. (“Visa”). Until the resolution of certain litigation, at which time the Visa Class B common stock will convert to publicly traded Visa Class A common stock, these shares are only transferable to other stockholders of Visa Class B common stock. As a result, there is limited transfer activity in private transactions between buyers and sellers. Given this limited trading activity and the continuing uncertainty regarding the likelihood, ultimate timing and eventual exchange rate for shares of Visa Class B common stock into shares of Visa Class A common stock, these shares are not considered to have a readily determinable fair value and have no carrying value. BancShares continues to monitor the trading activity in Visa Class B common stock and the status of the resolution of certain litigation matters at Visa that would trigger the conversion of the Visa Class B common stock into Visa Class A common stock.

As of September 30, 2022 and December 31, 2021, no ACL was required for available for sale or held to maturity debt securities. Accrued interest receivables for available for sale and held to maturity debt securities were excluded from the estimate for credit losses. At September 30, 2022, accrued interest receivables for available for sale and held to maturity debt securities were $29 million and $16 million, respectively. At December 31, 2021, accrued interest receivables for available for sale and held to maturity debt securities were $22 million and $7 million, respectively. During the three and nine months ended September 30, 2022 and 2021, there was no accrued interest that was deemed uncollectible and written off against interest income.

The following table provides the amortized cost and fair value by contractual maturity. Expected maturities will differ from contractual maturities on certain securities because borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties. Residential and commercial mortgage-backed and government agency securities are stated separately as they are not due at a single maturity date.

Maturities - Debt Securities


dollars in millions	September 30, 2022				December 31, 2021
	Cost		Fair Value		Cost		Fair Value
Investment securities available for sale
Non-amortizing securities maturing in:
One year or less	$	48	$	48	$	—	$	—
After one through five years	2,063		1,914		2,049		2,048
After five through 10 years	503		481		523		548
After 10 years	16		15		17		17

Government agency	175		173		221		221
Residential mortgage-backed securities	5,450		4,784		4,757		4,729
Commercial mortgage-backed securities	1,828		1,673		1,648		1,640
Total investment securities available for sale	$	10,083	$	9,088	$	9,215	$	9,203
Investment securities held to maturity
Non-amortizing securities maturing in:
One year or less	$	53	$	51	$	2	$	2
After one through five years	1,334		1,190		—		—
After five through 10 years	930		783		—		—


Residential mortgage-backed securities	4,510		3,745		2,322		2,306
Commercial mortgage-backed securities	2,834		2,397		1,485		1,451


Total investment securities held to maturity	$	9,661	$	8,166	$	3,809	$	3,759

The following table presents interest and dividend income on investment securities.

Interest and Dividends on Investment Securities


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest income - taxable investment securities	$	89	$	39	$	260	$	104



Dividend income - marketable equity securities	1		1		2		2
Interest on investment securities	$	90	$	40	$	262	$	106

The following table provides the gross realized gains and losses on the sales of investment securities available for sale:

Realized Gains on Debt Securities Available For Sale


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Gross realized gains on sales of investment securities available for sale	$	—	$	8	$	—	$	33
Gross realized losses on sales of investment securities available for sale	—		—		—		—
Net realized gains on sales of investment securities available for sale	$	—	$	8	$	—	$	33

The following table provides the fair value adjustment on marketable equity securities:

Fair Value Adjustment on Marketable Equity Securities


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021


Fair value adjustment on marketable equity securities, net	$	(2)	$	3	$	(5)	$	31

The following table provides information regarding investment securities available for sale with unrealized losses for which an ACL has not been recorded:

Gross Unrealized Losses on Debt Securities Available For Sale


dollars in millions	September 30, 2022
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment securities available for sale
U.S. Treasury	$	1,900	$	(147)	$	—	$	—	$	1,900	$	(147)
Government agency	70		(1)		65		(1)		135		(2)
Residential mortgage-backed securities	2,178		(231)		2,573		(435)		4,751		(666)
Commercial mortgage-backed securities	938		(64)		688		(91)		1,626		(155)
Corporate bonds	493		(23)		44		(2)		537		(25)
Total	$	5,579	$	(466)	$	3,370	$	(529)	$	8,949	$	(995)

	December 31, 2021
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment securities available for sale
U.S. Treasury	$	1,811	$	(2)	$	—	$	—	$	1,811	$	(2)
Government agency	17		—		79		(1)		96		(1)
Residential mortgage-backed securities	3,992		(36)		1		—		3,993		(36)
Commercial mortgage-backed securities	852		(15)		111		(2)		963		(17)
Corporate bonds	52		(1)		—		—		52		(1)
Total	$	6,724	$	(54)	$	191	$	(3)	$	6,915	$	(57)

As of September 30, 2022, there were 124 investment securities available for sale with continuous unrealized losses for more than 12 months, of which 118 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and the remaining six related to corporate bonds.

None of the unrealized losses identified as of September 30, 2022, or December 31, 2021, relate to the issuer’s ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment. BancShares considered other factors including changes in credit ratings, delinquencies, and other macroeconomic factors in this determination. As a result, none of the securities were deemed to require an ACL. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.

Investment securities having an aggregate carrying value of $3.9 billion at September 30, 2022, and $5.7 billion at December 31, 2021, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.

BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the World Bank and Federal Deposit Insurance Corporation (“FDIC”) guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury, the World Bank and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no ACL has been recorded on these securities. In the event there are downgrades to the credit rating of the U.S. Treasury or the World Bank or losses reported on securities issued by government agencies and government sponsored entities, BancShares will reevaluate its determination of zero expected credit losses on held to maturity debt securities.

A security is considered past due once it is 30 days contractually past due under the terms of the agreement. There were no securities past due as of September 30, 2022 and December 31, 2021.

There were no debt securities held to maturity on non-accrual status as of September 30, 2022 and December 31, 2021.

Certain investments held by BancShares were recorded in other assets. BancShares held FHLB stock of $234 million and $40 million at September 30, 2022 and December 31, 2021, respectively; these securities are recorded at cost. BancShares held $55 million and $1 million of nonmarketable securities without readily determinable fair values measured under the measurement exception at September 30, 2022 and December 31, 2021, respectively. Investments in qualified affordable housing projects that qualify for the proportional amortization method were $558 million and $156 million at September 30, 2022 and December 31, 2021, respectively.

NOTE 4 — LOANS AND LEASES

The following tables as of September 30, 2022 include loan and lease balances acquired in the CIT Merger, which were recorded at fair value on the Merger Date. Refer to Note 2 — Business Combinations for further information. Refer to Note 1 — Accounting Policies and Basis of Presentation for updates to our accounting policies related to loans.

Unless otherwise noted, loans held for sale are not included in the following tables. Leases in the following tables include finance leases but exclude operating lease equipment.

Loans by Class


dollars in millions	September 30, 2022		December 31, 2021
Commercial
Commercial construction	$	2,752	$	1,238
Owner occupied commercial mortgage	14,053		12,099
Non-owner occupied commercial mortgage	9,683		3,041
Commercial and industrial	24,288		5,937
Leases	2,184		271
Total commercial	52,960		22,586
Consumer
Residential mortgage	12,910		6,088
Revolving mortgage	1,923		1,818
Consumer auto	1,385		1,332
Consumer other	612		548
Total consumer	16,830		9,786
Total loans and leases	$	69,790	$	32,372

At September 30, 2022 and December 31, 2021, accrued interest receivable on loans included in other assets was $171 million and $87 million, respectively, and was excluded from the estimate of credit losses.

The following table presents selected components of the amortized cost of loans.

Components of Amortized Cost


dollars in millions	September 30, 2022		December 31, 2021
Deferred fees, including unearned fees and unamortized costs on non-PCD loans	$	72	$	32

Net unamortized discount on purchased loans
Non-PCD	$	81	$	11
PCD	50		29
Total net unamortized discount	$	131	$	40

The aging of the outstanding loans and leases, by class, at September 30, 2022 and December 31, 2021 is provided in the tables below. Loans and leases less than 30 days past due are considered current, as various grace periods allow borrowers to make payments within a stated period after the due date and remain in compliance with the respective agreement.

Loans and Leases - Delinquency Status


dollars in millions	September 30, 2022
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total
Commercial
Commercial construction	$	5	$	—	$	—	$	5	$	2,747	$	2,752
Owner occupied commercial mortgage	23		3		26		52		14,001		14,053
Non-owner occupied commercial mortgage	34		—		46		80		9,603		9,683
Commercial and industrial	80		20		21		121		24,167		24,288
Leases	41		15		14		70		2,114		2,184
Total commercial	183		38		107		328		52,632		52,960
Consumer
Residential mortgage	74		16		48		138		12,772		12,910
Revolving mortgage	9		2		8		19		1,904		1,923
Consumer auto	7		1		2		10		1,375		1,385
Consumer other	4		2		4		10		602		612
Total consumer	94		21		62		177		16,653		16,830
Total loans and leases	$	277	$	59	$	169	$	505	$	69,285	$	69,790

	December 31, 2021
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total
Commercial
Commercial construction	$	1	$	—	$	2	$	3	$	1,235	$	1,238
Owner occupied commercial mortgage	21		1		9		31		12,068		12,099
Non-owner occupied commercial mortgage	3		—		2		5		3,036		3,041
Commercial and industrial	8		3		5		16		5,921		5,937
Leases	—		1		1		2		269		271
Total commercial	33		5		19		57		22,529		22,586
Consumer
Residential mortgage	24		6		23		53		6,035		6,088
Revolving mortgage	6		2		6		14		1,804		1,818
Consumer auto	6		1		1		8		1,324		1,332
Consumer other	2		2		1		5		543		548
Total consumer	38		11		31		80		9,706		9,786
Total loans and leases	$	71	$	16	$	50	$	137	$	32,235	$	32,372

The amortized cost, by class, of loans and leases on non-accrual status, and loans and leases greater than 90 days past due and still accruing at September 30, 2022 and December 31, 2021 are presented below.

Loans on Non-Accrual Status (1) (2)


dollars in millions	September 30, 2022				December 31, 2021
	Non-Accrual Loans		Loans > 90 Days and Accruing		Non-Accrual Loans		Loans > 90 Days and Accruing
Commercial
Commercial construction	$	20	$	—	$	4	$	—
Owner occupied commercial mortgage	41		3		18		5
Non-owner occupied commercial mortgage	96		28		5		—
Commercial and industrial	172		3		15		1
Leases	27		5		3		—
Total commercial	356		39		45		6
Consumer
Residential mortgage	74		8		54		—
Revolving mortgage	19		—		18		—
Consumer auto	4		—		3		—
Consumer other	1		3		1		1
Total consumer	98		11		76		1
Total loans and leases	$	454	$	50	$	121	$	7

(1) Accrued interest that was reversed when the loan went to non-accrual status was $2 million for the nine months ended September 30, 2022.

(2) Non-accrual loans for which there was no related ACL totaled $41 million at September 30, 2022 and $15 million at December 31, 2021.

Other real estate owned (“OREO”) and repossessed assets were $54 million as of September 30, 2022 and $40 million as of December 31, 2021.

Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. Commercial loans and leases and consumer loans have different credit quality indicators as a result of the unique characteristics of the loan classes being evaluated. The credit quality indicators for Non-PCD commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Commercial loans are evaluated periodically with more frequent evaluations done on criticized loans. The indicators as of the date presented are based on the most recent assessment performed and are defined below:

Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

Special mention – A special mention asset has potential weaknesses which deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.

Loss – Assets classified as loss are considered uncollectible and of such little value it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.

Ungraded – Ungraded loans represent loans not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at September 30, 2022 and December 31, 2021, relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit.

The credit quality indicator for consumer loans is based on delinquency status of the borrower as of the date presented. As the borrower becomes more delinquent, the likelihood of loss increases. An exemption is applied to government guaranteed loans as the principal repayments are insured by the Federal Housing Administration (“FHA”) and U.S. Department of Veterans Affairs and thus remain on accrual status regardless of delinquency status.

The following table summarizes the commercial loans disaggregated by year of origination and by risk rating. The consumer loan delinquency status by year of origination is also presented below. The tables reflect the amortized cost of the loans and include PCD loans.

Commercial Loans - Risk Classifications by Class


September 30, 2022
Risk Classification:	Term Loans by Origination Year														Revolving Converted to Term Loans
dollars in millions	2022		2021		2020		2019		2018		2017 & Prior		Revolving				Total
Commercial construction
Pass	$	782	$	816	$	628	$	222	$	27	$	81	$	67	$	—	$	2,623
Special Mention	3		—		17		18		29		—		—		—		67
Substandard	2		—		—		42		11		4		—		—		59
Doubtful	—		—		—		3		—		—		—		—		3
Ungraded	—		—		—		—		—		—		—		—		—
Total commercial construction	787		816		645		285		67		85		67		—		2,752
Owner occupied commercial mortgage
Pass	2,095		3,261		3,043		1,883		1,095		2,031		174		—		13,582
Special Mention	31		23		38		33		17		49		1		—		192
Substandard	7		29		40		43		40		114		5		—		278
Doubtful	—		—		—		—		—		1		—		—		1
Ungraded	—		—		—		—		—		—		—		—		—
Total owner occupied commercial mortgage	2,133		3,313		3,121		1,959		1,152		2,195		180		—		14,053
Non-owner occupied commercial mortgage
Pass	1,918		1,668		1,833		1,575		774		1,147		43		—		8,958
Special Mention	—		1		32		83		3		10		1		—		130
Substandard	4		12		66		293		60		148		—		—		583
Doubtful	—		—		—		5		—		7		—		—		12
Ungraded	—		—		—		—		—		—		—		—		—
Total non-owner occupied commercial mortgage	1,922		1,681		1,931		1,956		837		1,312		44		—		9,683
Commercial and industrial
Pass	6,784		4,502		2,278		1,745		997		1,108		5,046		33		22,493
Special Mention	84		126		86		73		60		31		31		—		491
Substandard	70		109		184		150		173		192		289		1		1,168
Doubtful	—		1		1		3		13		18		5		—		41
Ungraded	—		—		—		—		—		—		95		—		95
Total commercial and industrial	6,938		4,738		2,549		1,971		1,243		1,349		5,466		34		24,288
Leases
Pass	547		523		457		257		106		116		—		—		2,006
Special Mention	13		18		26		10		5		2		—		—		74
Substandard	21		32		19		16		8		1		—		—		97
Doubtful	1		2		2		1		1		—		—		—		7
Ungraded	—		—		—		—		—		—		—		—		—
Total leases	582		575		504		284		120		119		—		—		2,184
Total commercial	$	12,362	$	11,123	$	8,750	$	6,455	$	3,419	$	5,060	$	5,757	$	34	$	52,960

Consumer Loans - Delinquency Status by Class


September 30, 2022
Days Past Due:	Term Loans by Origination Year														Revolving Converted to Term Loans
dollars in millions	2022		2021		2020		2019		2018		2017 & Prior		Revolving				Total
Residential mortgage
Current	$	2,797	$	3,759	$	2,156	$	842	$	432	$	2,763	$	23	$	—	$	12,772
30-59 days	6		5		3		5		5		50		—		—		74
60-89 days	—		3		1		—		1		11		—		—		16
90 days or greater	—		1		1		2		2		42		—		—		48
Total residential mortgage	2,803		3,768		2,161		849		440		2,866		23		—		12,910
Revolving mortgage
Current	—		—		—		—		—		—		1,784		120		1,904
30-59 days	—		—		—		—		—		—		6		3		9
60-89 days	—		—		—		—		—		—		1		1		2
90 days or greater	—		—		—		—		—		—		3		5		8
Total revolving mortgage	—		—		—		—		—		—		1,794		129		1,923
Consumer auto
Current	470		437		241		128		71		28		—		—		1,375
30-59 days	1		2		2		1		1		—		—		—		7
60-89 days	—		1		—		—		—		—		—		—		1
90 days or greater	—		1		—		—		—		1		—		—		2
Total consumer auto	471		441		243		129		72		29		—		—		1,385
Consumer other
Current	121		91		15		7		3		19		346		—		602
30-59 days	—		—		—		—		—		2		2		—		4
60-89 days	—		—		—		—		—		1		1		—		2
90 days or greater	—		—		—		—		—		3		1		—		4
Total consumer other	121		91		15		7		3		25		350		—		612
Total consumer	$	3,395	$	4,300	$	2,419	$	985	$	515	$	2,920	$	2,167	$	129	$	16,830

The following tables represent current credit quality indicators by origination year as of December 31, 2021.

Commercial Loans - Risk Classifications by Class


December 31, 2021
Risk Classification:	Term Loans by Origination Year														Revolving Converted to Term Loans
dollars in millions	2021		2020		2019		2018		2017		2016 & Prior		Revolving				Total
Commercial construction
Pass	$	540	$	400	$	189	$	29	$	48	$	11	$	10	$	—	$	1,227
Special Mention	—		—		—		—		—		1		—		—		1
Substandard	2		—		1		2		4		1		—		—		10
Doubtful	—		—		—		—		—		—		—		—		—
Ungraded	—		—		—		—		—		—		—		—		—
Total commercial construction	542		400		190		31		52		13		10		—		1,238
Owner occupied commercial mortgage
Pass	3,045		3,022		1,873		1,194		963		1,572		125		—		11,794
Special Mention	3		35		37		22		13		33		5		—		148
Substandard	31		16		18		12		18		56		6		—		157
Doubtful	—		—		—		—		—		—		—		—		—
Ungraded	—		—		—		—		—		—		—		—		—
Total owner occupied commercial mortgage	3,079		3,073		1,928		1,228		994		1,661		136		—		12,099
Non-owner occupied commercial mortgage
Pass	644		737		578		263		266		412		37		—		2,937
Special Mention	1		—		—		3		3		10		—		—		17
Substandard	9		11		24		12		7		22		1		—		86
Doubtful	—		—		—		—		1		—		—		—		1
Ungraded	—		—		—		—		—		—		—		—		—
Total non-owner occupied commercial mortgage	654		748		602		278		277		444		38		—		3,041
Commercial and industrial
Pass	2,107		1,018		599		257		149		281		1,342		5		5,758
Special Mention	9		7		20		2		4		5		5		—		52
Substandard	20		7		3		4		2		2		16		1		55
Doubtful	—		—		—		—		—		—		—		—		—
Ungraded	—		—		—		—		—		—		72		—		72
Total commercial and industrial	2,136		1,032		622		263		155		288		1,435		6		5,937
Leases
Pass	93		68		38		42		17		8		—		—		266
Special Mention	—		1		—		—		—		—		—		—		1
Substandard	2		1		—		1		—		—		—		—		4
Doubtful	—		—		—		—		—		—		—		—		—
Ungraded	—		—		—		—		—		—		—		—		—
Total leases	95		70		38		43		17		8		—		—		271
Total commercial	$	6,506	$	5,323	$	3,380	$	1,843	$	1,495	$	2,414	$	1,619	$	6	$	22,586

Consumer Loans - Delinquency Status by Class


December 31, 2021
Days Past Due:	Term Loans by Origination Year														Revolving Converted to Term Loans
dollars in millions	2021		2020		2019		2018		2017		2016 & Prior		Revolving				Total
Residential mortgage
Current	$	2,139	$	1,663	$	627	$	368	$	349	$	867	$	22	$	—	$	6,035
30-59 days	2		3		2		2		1		14		—		—		24
60-89 days	—		—		—		1		1		4		—		—		6
90 days or greater	1		1		1		2		1		17		—		—		23
Total residential mortgage	2,142		1,667		630		373		352		902		22		—		6,088
Revolving mortgage
Current	—		—		—		—		—		—		1,678		126		1,804
30-59 days	—		—		—		—		—		—		4		2		6
60-89 days	—		—		—		—		—		—		—		2		2
90 days or greater	—		—		—		—		—		—		2		4		6
Total revolving mortgage	—		—		—		—		—		—		1,684		134		1,818
Consumer auto
Current	597		343		198		119		48		19		—		—		1,324
30-59 days	1		2		1		1		—		1		—		—		6
60-89 days	—		—		—		—		—		1		—		—		1
90 days or greater	—		—		—		—		—		1		—		—		1
Total consumer auto	598		345		199		120		48		22		—		—		1,332
Consumer other
Current	131		24		11		4		2		29		342		—		543
30-59 days	—		—		—		—		—		—		2		—		2
60-89 days	1		—		—		—		—		—		1		—		2
90 days or greater	—		—		—		—		—		—		1		—		1
Total consumer other	132		24		11		4		2		29		346		—		548
Total consumer	$	2,872	$	2,036	$	840	$	497	$	402	$	953	$	2,052	$	134	$	9,786

Purchased loans and leases

The following table summarizes PCD loans and leases that BancShares acquired in the CIT Merger.

PCD Loans and Leases - CIT Merger


dollars in millions	Total PCD from CIT Merger
UPB	$	3,550
Initial PCD ACL	(272)
Fair value discount, net of the PCD Gross-Up	(45)
Purchase price	$	3,233

The recorded fair values of Non-PCD loans acquired in the CIT Merger as of the acquisition date was $29.5 billion, resulting in a PAA discount of $61 million.

Troubled Debt Restructuring

As part of BancShares’ ongoing risk-management practices, BancShares attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications are made in accordance with internal policies and guidelines to conform to regulatory guidance. BancShares accounts for certain loan modifications or restructurings as troubled debt restructurings (“TDRs”). In general, a modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. BancShares may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty.

Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty, and whether a concession has been granted, are subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR. In accordance with regulatory guidance discussed below, certain loan modifications that might ordinarily have qualified as TDRs were not accounted for as TDRs.

The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (the “Interagency Statement”) was published by banking regulators in April 2020 to clarify expectations around loan modifications and the determination of TDRs for borrowers experiencing COVID-19-related financial difficulty. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and Interagency Statement offer some practical expedients for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. Any loan modification that meets these practical expedients would not automatically be considered a TDR because the borrower is presumed not to be experiencing financial difficulty at the time of the loan modification. BancShares applied this regulatory guidance during its TDR identification process through January 1, 2022 for short-term loan forbearance agreements as a result of COVID-19 and in most cases did not record these as TDRs.

Modified loans that meet the definition of a TDR are subject to BancShares’ individually reviewed loans policy.

The following table presents amortized cost of TDRs.

TDRs


dollars in millions	September 30, 2022
	Accruing		Non-Accruing		Total
Commercial
Commercial construction	$	2	$	1	$	3
Owner occupied commercial mortgage	45		10		55
Non-owner occupied commercial mortgage	28		31		59
Commercial and industrial	49		11		60
Leases	—		1		1
Total commercial	124		54		178
Consumer
Residential mortgage	32		18		50
Revolving mortgage	17		6		23
Consumer auto	2		—		2
Consumer other	—		—		—
Total consumer	51		24		75
Total TDRs	$	175	$	78	$	253


	December 31, 2021
	Accruing		Non-Accruing		Total
Commercial
Commercial construction	$	2	$	—	$	2
Owner occupied commercial mortgage	57		8		65
Non-owner occupied commercial mortgage	26		3		29
Commercial and industrial	12		9		21
Leases	—		1		1
Total commercial	97		21		118
Consumer
Residential mortgage	29		18		47
Revolving mortgage	17		7		24
Consumer auto	2		—		2
Consumer other	1		—		1
Total consumer	49		25		74
Total TDRs	$	146	$	46	$	192

The following table summarizes the loan restructurings during the three and nine months ended September 30, 2022 and 2021 that were designated as TDRs. BancShares defines payment default as movement of the TDR to non-accrual status, which is generally 90 days past due, foreclosure or charge-off, whichever occurs first.

Restructurings


dollars in millions (except for number of loans)	Three Months Ended September 30,
	2022			2021
	Number of Loans	Amortized Cost at Period End			Number of Loans	Amortized Cost at Period End
Loans and leases
Interest only	5	$	31		7	$	10
Loan term extension	35	30			41	6
Below market rates	17	4			47	3
Discharge from bankruptcy	36	2			21	3
Total	93	$	67		116	$	22

	Nine Months Ended September 30,
	2022			2021
	Number of Loans	Amortized Cost at Period End			Number of Loans	Amortized Cost at Period End
Loans and leases
Interest only	13	$	37		17	$	20
Loan term extension	110	51			112	15
Below market rates	62	8			148	21
Discharge from bankruptcy	78	4			110	12
Total	263	$	100		387	$	68

There were $3 million and $0.4 million of commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs as of September 30, 2022 and December 31, 2021, respectively.

After a loan is determined to be a TDR, BancShares continues to track its performance under its most recent restructured terms. TDRs that subsequently defaulted during the three and nine months ended September 30, 2022 and 2021, and were classified as TDRs during the applicable 12-month period preceding September 30, 2022 and 2021 were as follows:

TDR Defaults


dollars in millions	Three Months Ended September 30,
	2022		2021
TDR Defaults	$	2	$	1

	Nine Months Ended September 30,
	2022		2021
TDR Defaults	$	4	$	5

Loans Pledged

The following table provides information regarding loans pledged as collateral for borrowing capacity through the FHLB of Atlanta and the Federal Reserve Bank (“FRB”) as of September 30, 2022 and December 31, 2021:

Loans Pledged


dollars in millions	September 30, 2022		December 31, 2021
FHLB of Atlanta
Lendable collateral value of pledged non-PCD loans	$	14,390	$	9,564
Less: Advances	5,800		645
Less: Letters of Credit	1,450		—
Available borrowing capacity	$	7,140	$	8,919
Pledged non-PCD loans (contractual balance)	$	21,093	$	14,507

FRB
Lendable collateral value of pledged non-PCD loans	$	4,464	$	3,951
Less: Advances	—		—
Available borrowing capacity	$	4,464	$	3,951
Pledged non-PCD loans (contractual balance)	$	5,533	$	4,806

NOTE 5 — ALLOWANCE FOR CREDIT LOSSES

The ACL for loans and leases is reported in the allowance for credit losses on the Consolidated Balance Sheets, while the ACL for unfunded commitments is reported in other liabilities. The provision or benefit for credit losses related to both (i) loans and leases and (ii) unfunded commitments is reported in the Consolidated Statements of Income as provision or benefit for credit losses. The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. Forecasted economic conditions are developed using third party macroeconomic scenarios and may be adjusted based on management’s expectations over the lives of the portfolios. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product (“GDP”), home price index, commercial real estate index, corporate profits, and credit spreads.

The processes and methodologies we utilized to determine the ACL at September 30, 2022 were consistent with those utilized to determine the ACL at June 30, 2022. As previously disclosed in our Quarterly Report on Form 10-Q as of and for the quarterly period ended March 31, 2022, we changed certain aspects of our ACL methodology during the three month period ended March 31, 2022. BancShares made these changes to integrate the ACL methodologies of CIT and BancShares. The most significant changes in the ACL methodology compared to that utilized to determine the ACL at December 31, 2021 include the following: (i) utilized economic scenario forecasts over the lives of the loan portfolios instead of using a two year reasonable and supportable period with a one year reversion period followed by a historical long run average economic forecast for the remainder of the portfolio life; and (ii) implemented scenario weighting of a range of economic scenarios, including baseline, upside, and downside scenarios instead of utilizing just the consensus baseline scenario as the basis of the quantitative ACL estimate.

The initial ACL for PCD loans and leases acquired in the CIT Merger (the “Initial PCD ACL”) of $272 million was established through the PCD Gross-Up and there was no corresponding increase to the provision for credit losses. The PCD Gross-Up is discussed further in Note 2 — Business Combinations. The initial ACL for Non-PCD loans and leases acquired in the CIT Merger was established through a corresponding increase of $454 million to the provision for credit losses (the “Initial Non-PCD Provision”).

The ACL activity for loans and leases and the ACL for unfunded commitments is summarized in the following tables.

ACL for Loans and Leases


dollars in millions	Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022
	Commercial		Consumer		Total		Commercial		Consumer		Total
Balance at beginning of period	$	740	$	110	$	850	$	80	$	98	$	178
Initial PCD ACL(1)	—		—		—		258		14		272
Initial Non-PCD Provision	—		—		—		432		22		454
Provision (benefit) for credit losses - loans and leases	43		7		50		53		(20)		33
Total provision for credit losses- loans and leases	43		7		50		485		2		487
Charge-offs(1)	(28)		(5)		(33)		(92)		(15)		(107)
Recoveries	11		4		15		35		17		52

Balance at September 30, 2022	$	766	$	116	$	882	$	766	$	116	$	882

	Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
	Commercial		Consumer		Total		Commercial		Consumer		Total
Balance at beginning of period	$	86	$	103	$	189	$	92	$	133	$	225
Provision (benefit) for credit losses - loans and leases	—		(1)		(1)		(3)		(29)		(32)
Charge-offs	(7)		(4)		(11)		(14)		(13)		(27)
Recoveries	3		3		6		7		10		17

Balance at September 30, 2021	$	82	$	101	$	183	$	82	$	101	$	183

ACL for Unfunded Commitments


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning balance	$	81	$	11	$	12	$	13
Provision (benefit) for credit losses - unfunded commitments	10		—		79		(2)
Ending balance	$	91	$	11	$	91	$	11

For the period ended September 30, 2022, the increase in the ACL for unfunded commitments compared to September 30, 2021 primarily reflected the additional commitments acquired in the CIT Merger.

NOTE 6 — LEASES

Lessee

BancShares leases primarily include administrative offices and bank locations. Substantially all of our lease liabilities relate to United States real estate leases under operating lease arrangements. Our real estate leases have remaining lease terms of up to 17 years. Our lease terms may include options to extend or terminate the lease. The options are included in the lease term when it is determined that it is reasonably certain the option will be exercised.

The following table presents supplemental balance sheet information and remaining weighted average lease terms and discount rates.

Supplemental Lease Information


dollars in millions	Classification	September 30, 2022			December 31, 2021
ROU assets:
Operating leases	Other assets	$	366		$	64
Finance leases	Premises and equipment	7			4
Total ROU assets		$	373		$	68
Lease liabilities:
Operating leases	Other liabilities	$	373		$	64
Finance leases	Other borrowings	8			4
Total lease liabilities		$	381		$	68
Weighted-average remaining lease terms:
Operating leases		9.6 years			8.9 years
Finance leases		4.4 years			3.5 years
Weighted-average discount rate:
Operating leases		2.13		%	3.00		%
Finance leases		2.34		%	3.12		%

The following table presents components of lease cost:

Components of Net Lease Cost


dollars in millions		Three Months Ended September 30,				Nine Months Ended September 30,
	Classification	2022		2021		2022		2021
Lease cost
Operating lease cost(1)(2)	Occupancy Expense	$	14	$	3	$	44	$	10
Finance lease cost
Amortization of leased assets	Equipment expense	1		1		2		2
Interest on lease liabilities	Interest expense - Other borrowings	—		—		—		—
Variable lease cost	Occupancy Expense	3		1		9		3
Sublease income	Occupancy Expense	(1)		—		(2)		—
Net lease cost		$	17	$	5	$	53	$	15

(1) Includes short-term lease cost, which is not significant.

(2) In addition, approximately $2 million and $6 million of costs related to leased branches to be closed or subleased was included in merger-related expenses in the consolidated statements of income for the three and nine months ended September 30, 2022, respectively.

Variable lease cost includes common area maintenance, property taxes, utilities, and other operating expenses related to leased premises recognized in the period in which the expense was incurred. Certain of our lease agreements also include rental payments adjusted periodically for inflation. While lease liabilities are not remeasured because of these changes, these adjustments are treated as variable lease costs and recognized in the period in which the expense is incurred. Sublease income results from leasing excess building space that BancShares is no longer utilizing under operating leases, which have remaining lease terms of up to 14 years.

The following table presents supplemental cash flow information related to leases:

Supplemental Cash Flow Information


dollars in millions	Nine Months Ended September 30,
	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	40	$	10
Operating cash flows from finance leases	—		—
Financing cash flows from finance leases	2		2
ROU assets obtained in exchange for new operating lease liabilities	17		3
ROU assets obtained in exchange for new finance lease liabilities	5		—

The following table presents lease liability maturities for the remainder of 2022 through 2027 and thereafter at September 30, 2022:

Maturity of Lease Liabilities


dollars in millions	Operating Leases		Finance Leases		Total
Remainder of 2022	$	8	$	—	$	8
2023	55		2		57
2024	52		2		54
2025	47		2		49
2026	44		1		45
2027	41		1		42
Thereafter	167		—		167
Total undiscounted lease payments	$	414	$	8	$	422
Difference between undiscounted cash flows and discounted cash flows	41		—		41
Lease liabilities, at present value	$	373	$	8	$	381

Lessor

BancShares leases equipment to commercial end-users under operating lease and finance lease arrangements. The majority of operating lease equipment is long-lived rail equipment, which is typically leased several times over its life. We also lease technology and office equipment, and large and small industrial, medical, and transportation equipment under both operating leases and finance leases.

Our Rail operating leases typically do not include purchase options. Many of our finance leases, and other equipment operating leases, offer the lessee the option to purchase the equipment at fair market value or for a nominal fixed purchase option; and many of the leases that do not have a nominal purchase option include renewal provisions resulting in some leases continuing beyond the initial contractual term. Our leases typically do not include early termination options; and continued rent payments are due if leased equipment is not returned at the end of the lease.

The following table provides the net book value of operating lease equipment (net of accumulated depreciation of $236 million at September 30, 2022) by equipment type.

Operating Lease Equipment


dollars in millions	September 30, 2022
Railcars and locomotives(1)	$	7,248
Other equipment	736
Total(1)	$	7,984

(1) Includes off-lease rail equipment of $509 million at September 30, 2022.

The following table presents the components of the finance lease net investment on a discounted basis:

Components of Net Investment in Finance Leases


dollars in millions	September 30, 2022		December 31, 2021
Lease receivables	$	1,803	$	246
Unguaranteed residual assets	318		25
Total net investment in finance leases	2,121		271
Leveraged lease net investment(1)	63		—
Total	$	2,184	$	271

(1) Leveraged leases are reported net of non-recourse debt of $23 million at September 30, 2022. Our leveraged lease arrangements commenced before the Accounting Standards Codification (“ASC”) 842 effective date and continue to be reported under the leveraged lease accounting model. ASC 842 eliminated leveraged lease accounting for new leases and for existing leases modified on or after the standard’s effective date.

The table that follows presents lease income related to BancShares’ operating and finance leases:

Lease Income


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Lease income – Operating leases	$	201	$	—	$	592	$	—
Variable lease income – Operating leases(1)	18		—		48		—
Rental income on operating leases	219		—		640		—
Interest income - Sales type and direct financing leases	43		4		127		14
Variable lease income included in Other noninterest income(2)	13		—		37		—
Interest income - Leveraged leases	5		—		14		—
Total lease income	$	280	$	4	$	818	$	14

(1) Primarily includes per diem railcar operating lease rental income earned on a time or mileage usage basis.

(2) Includes leased equipment property tax reimbursements due from customers of $4 million and $13 million for the three and nine months ended September 30, 2022, respectively and revenue related to insurance coverage on leased equipment of $9 million and $24 million for the three and nine months ended September 30, 2022, respectively. There was no revenue related to property tax reimbursements due from customers or insurance coverage on leased equipment during 2021.

The following tables present lease payments due on non-cancellable operating leases and lease receivables due on finance leases at September 30, 2022. Excluded from these tables are variable lease payments, including rentals calculated based on asset usage levels, rentals from future renewal and re-leasing activity, and expected sales proceeds from remarketing equipment at lease expiration, all of which are components of lease profitability.

Maturity Analysis of Operating Lease Payments


dollars in millions
Remainder of 2022	$	221
2023	611
2024	448
2025	285
2026	179
2027	99
Thereafter	218
Total	$	2,061

Maturity Analysis of Lease Receivable Payments - Sales Type and Direct Financing Leases


dollars in millions
Remainder of 2022	$	245
2023	757
2024	492
2025	285
2026	144
2027	56
Thereafter	14
Total undiscounted lease receivables	$	1,993
Difference between undiscounted cash flows and discounted cash flows	190
Lease receivables, at present value	$	1,803

NOTE 7 — GOODWILL AND OTHER INTANGIBLES

Goodwill

BancShares applied the acquisition method of accounting for the CIT Merger. The fair value of the net assets acquired exceeded the purchase price. Consequently, there was a gain on acquisition (and no goodwill) related to the CIT Merger as discussed further in Note 2 — Business Combinations. BancShares had goodwill of $346 million at September 30, 2022 and December 31, 2021. The entire amount of goodwill relates to business combinations that BancShares completed prior to the CIT Merger and is reported in the General Banking segment. There was no goodwill impairment during 2022.

Core Deposit Intangibles

Core deposit intangibles represent the estimated fair value of core deposits and other customer relationships acquired. Core deposit intangibles are being amortized over their estimated useful life. The following tables summarize the activity for core deposit intangibles during the quarter ending September 30, 2022.

Core Deposit Intangibles


dollars in millions	2022
Balance, net of accumulated amortization at January 1	$	19
Core deposit intangibles related to the CIT Merger	143
Amortization for the period	(17)
Balance at September 30, net of accumulated amortization	$	145

Core Deposit Intangible Accumulated Amortization


dollars in millions	September 30, 2022		December 31, 2021
Gross balance	$	271	$	128
Accumulated amortization	(126)		(109)
Balance, net of accumulated amortization	$	145	$	19

The following table summarizes the expected amortization expense as of September 30, 2022 in subsequent periods for core deposit intangibles.

Core Deposit Intangible Expected Amortization


dollars in millions
Remainder 2022	$	5
2023	19
2024	17
2025	16
2026	15
2027	15
Thereafter	58
Total	$	145

Intangible Liability

An intangible liability of $52 million was recorded in other liabilities for net below market lessor lease contract rental rates related to the rail portfolio as a result of the CIT Merger. This lease intangible is being amortized on a straight-line basis over the lease term, thereby increasing rental income (a component of noninterest income) over the remaining term of the lease agreements.

The following tables summarize the activity for the intangible liability during the nine month period ending September 30, 2022.

Intangible Liability


dollars in millions	2022
Balance at January 1	$	—
Acquired in CIT Merger	52
Amortization	(12)
Balance at September 30, net of accumulated amortization	$	40

The following table summarizes the expected amortization as of September 30, 2022 in subsequent periods for the intangible liability.

Intangible Liability


dollars in millions
Remainder 2022	$	4
2023	12
2024	6
2025	4
2026	3
2027	2
Thereafter	9
Total	$	40

NOTE 8 — MORTGAGE SERVICING RIGHTS

BancShares originates certain residential mortgages loans to sell in the secondary market. BancShares’ portfolio of residential mortgage loans serviced for third parties was approximately $3.7 billion as of September 30, 2022 and December 31, 2021. For certain loans, the originated loans are sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights are recorded as a servicing asset and are reported in other assets. The associated amortization expense and any changes in the valuation allowance recognized were included as a reduction of mortgage income. Mortgage servicing rights (“MSRs”) are initially recorded at fair value and then carried at the lower of amortized cost or fair value.

Contractually specified mortgage servicing fees, late fees and ancillary fees earned are reported in mortgage income and were $2 million for each of the three months ended September 30, 2022 and 2021, and $7 million and $6 million for the nine months ended September 30, 2022 and 2021, respectively.

The following table presents changes in the servicing asset during the three and nine months ended September 30, 2022 and 2021:

Servicing Asset


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning balance	$	28	$	22	$	23	$	18
Servicing rights originated	—		2		4		9
Servicing rights obtained in CIT Merger	—		—		3		—
Amortization	(2)		(2)		(5)		(6)
Valuation allowance benefit	—		—		1		1
Ending balance	$	26	$	22	$	26	$	22

The following table presents the activity in the servicing asset valuation allowance:

Servicing Asset Valuation Allowance


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning balance	$	—	$	3	$	1	$	4
Valuation allowance benefit	—		—		(1)		(1)
Ending balance	$	—	$	3	$	—	$	3

MSRs valuations are performed using a pooling methodology where loans with similar risk characteristics are grouped together and evaluated using discounted cash flows to estimate the present value of future earnings. Key economic assumptions used to value MSRs were as follows:

MSRs Valuation Assumptions


	September 30, 2022			December 31, 2021
Discount rate	9.62		%	8.55		%


Weighted average constant prepayment rate	6.70		%	15.69		%
Weighted average cost to service a loan	$	81		$	88

The fair value of MSRs are sensitive to changes in assumptions and is determined by estimating the present value of the asset’s future cash flows by utilizing discount rates, prepayment rates, and other inputs. The discount rates applied to the cash flows in the valuation of MSRs are market-based and provided on a pretax basis. The prepayment rate is derived from dynamic modeling, which is compared to actual prepayment rates annually for reasonableness. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans.

NOTE 9 — OTHER ASSETS

The following table includes the components of other assets. The increases from December 31, 2021 primarily reflect the other assets acquired in the CIT Merger.

Other Assets


dollars in millions	September 30, 2022		December 31, 2021
Low-income housing tax credit and other unconsolidated investments	$	722	$	169
Right of use assets	366		64
Pension assets	378		289
Accrued interest receivable	286		134
Counterparty receivables	107		—
Fair value of derivative financial instruments	149		3
Nonmarketable equity securities	55		1
Other real estate owned	54		40
Mortgage servicing assets	26		23
Federal Home Loan Bank stock	234		40
Income tax receivable	816		799
Other	467		177
Total other assets	$	3,660	$	1,739

NOTE 10 — DEPOSITS

The following table provides detail on deposit types. The deposit balances as of September 30, 2022 reflect those acquired in the CIT Merger, as described in Note 2 — Business Combinations.

Deposit Types


dollars in millions	September 30, 2022		December 31, 2021
Noninterest-bearing demand	$	26,587	$	21,405
Checking with interest	16,118		12,694
Money market	21,818		10,590
Savings	14,722		4,236
Time	8,308		2,481
Total deposits	$	87,553	$	51,406

At September 30, 2022, the scheduled maturities of time deposits were:

Deposit Maturities


dollars in millions
Twelve months ended September 30,
2023	$	6,178
2024	1,187
2025	685
2026	95
2027	41
Thereafter	122
Total time deposits	$	8,308

Time deposits with a denomination of $250,000 or more were $1.5 billion and $593 million at September 30, 2022 and December 31, 2021, respectively.

As of December 31, 2021, FCB’s primary deposit markets were North Carolina and South Carolina, which represent approximately 50.8% and 22.7%, respectively, of total FCB deposits. The CIT Merger added deposits that were primarily in California (which also includes its internet banking). Deposits (based on branch location) as of September 30, 2022, in North Carolina, California, and South Carolina represented approximately 41.5%, 28.9%, and 13.6%, respectively, of total deposits.

NOTE 11 — VARIABLE INTEREST ENTITIES

Variable Interest Entities

Described below are the results of BancShares’ assessment of its variable interests in order to determine its current status with regard to being the VIE PB. Refer to Note 1 — Accounting Policies and Basis of Presentation for additional information on accounting for VIEs.

Consolidated VIEs

At September 30, 2022 and December 31, 2021, there were no consolidated VIEs.

Unconsolidated VIEs

Unconsolidated VIEs include limited partnership interests and joint ventures where BancShares’ involvement is limited to an investor interest and BancShares does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance or obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The table below presents potential losses that would be incurred under hypothetical circumstances, such that the value of its interests and any associated collateral declines to zero and assuming no recovery or offset from any economic hedges. BancShares believes the possibility is remote under this hypothetical scenario; accordingly, this disclosure is not an indication of expected loss.

Unconsolidated VIEs Carrying Value


dollars in millions	September 30, 2022		December 31, 2021
Tax credit equity investments	$	563	$	157
Equity investments	155		12
Total assets	$	718	$	169
Commitments to tax credit investments(1)	$	264	$	43
Total liabilities	$	264	$	43
Maximum loss exposure	$	718	$	169

(1) Represents commitments to invest in affordable housing investments, and other investments qualifying for community reinvestment tax credits. These commitments are payable on demand and are recorded in other liabilities.

NOTE 12 — BORROWINGS

Short-term Borrowings

Short-term borrowings at September 30, 2022 and December 31, 2021 include:


dollars in millions	September 30, 2022		December 31, 2021
Securities sold under customer repurchase agreements	$	578	$	589
Notes payable to FHLB of Atlanta at overnight SOFR plus spreads ranging from 0.18% to 0.20%.	2,550		—


Total short-term borrowings	$	3,128	$	589

Securities Sold under Agreements to Repurchase

At September 30, 2022, BancShares held $578 million of securities sold under agreements to repurchase, with overnight contractual maturities, and are collateralized by government agency securities. At December 31, 2021, BancShares held $589 million of securities sold under agreements to repurchase, with overnight and continuous remaining contractual maturities, of which $508 million were collateralized by government agency securities and $81 million collateralized by commercial mortgage-backed securities.

BancShares utilizes securities sold under agreements to repurchase to facilitate the needs for collateralization of commercial customers and secure wholesale funding needs. The carrying value of investment securities pledged as collateral under repurchase agreements was $572 million and $619 million at September 30, 2022 and December 31, 2021, respectively.

Long-term Borrowings

Long-term borrowings at September 30, 2022 and December 31, 2021 include:


dollars in millions	Maturity	September 30, 2022		December 31, 2021
Parent Company:
Senior:
Unsecured term loan at 1-month LIBOR plus 1.10%	September 2022	$	—	$	68
Subordinated:


Fixed-to-Floating subordinated notes at 3.375%	March 2030	350		350
Junior subordinated debenture at 3-month LIBOR plus 2.25% (FCB/SC Capital Trust II)	June 2034	20		20
Junior subordinated debenture at 3-month LIBOR plus 1.75% (FCB/NC Capital Trust III)	June 2036	88		88
Subsidiaries:
Senior:
Senior unsecured fixed to floating rate notes at 3.929%(1)	June 2024	500		—
Senior unsecured fixed to floating rate notes at 2.969%(1)	September 2025	315		—
Fixed senior unsecured notes at 6.00%(1)	April 2036	51		—
Subordinated:
Fixed subordinated notes at 6.125%(1)	March 2028	400		—
Fixed-to-Fixed subordinated notes at 4.125%(1)	November 2029	100		—
Junior subordinated debentures at 3-month LIBOR plus 2.80% (Macon Capital Trust I)	March 2034	14		14
Junior subordinated debentures at 3-month LIBOR plus 2.85% (SCB Capital Trust I)	April 2034	10		10
Secured:
Notes payable to FHLB of Atlanta at overnight SOFR plus spreads ranging from 0.24% to 0.37%.	Maturities through September 2025	3,250		—
Fixed notes payable to FHLB of Atlanta	Maturities through March 2032	—		645
Other secured financings(1)	Maturities through January 2024	17		—
Capital lease obligations	Maturities through June 2027	8		4
Unamortized issuance costs		(2)		(2)
Unamortized purchase accounting adjustments(2)		94		(2)
Total long-term borrowings		$	5,215	$	1,195

(1) Reflects the remaining outstanding debt securities assumed by the BancShares in connection with the CIT Merger. On February 24, 2022, BancShares redeemed all of the outstanding (i) 5.00% senior unsecured notes due 2022, (ii) 5.00%, senior unsecured notes due 2023; (iii) 4.750% senior unsecured notes due 2024; and (iv) 5.250% senior unsecured notes due 2025 that it had assumed in the CIT Merger.

(2) At September 30, 2022 and December 31, 2021, unamortized purchase accounting adjustments were $72 million and $2 million, respectively, for subordinated debentures.

Long-term borrowings maturing in each of the five years subsequent to September 30, 2022 and thereafter include:

Long-term Borrowings Maturities


dollars in millions
Twelve months ended September 30,
2023	$	19
2024	2,186
2025	1,931
2026	16
2027	19
Thereafter	1,044
Total long-term borrowings	$	5,215

Senior Unsecured Notes

Senior unsecured notes included the following as of September 30, 2022:

•Fixed-rate senior unsecured notes outstanding totaled $866 million with a weighted average coupon rate of 3.70%. These notes were assumed by FCB as part of the CIT Merger. On February 24, 2022, FCB completed a redemption of approximately $2.9 billion of senior unsecured notes that were assumed in the CIT Merger, resulting in a gain of approximately $6 million.

Subordinated Unsecured Notes

Subordinated unsecured notes included the following as of September 30, 2022:

•$350 million aggregate principal amount of its 3.375% fixed-to-floating rate subordinated notes due 2030 and redeemable at the option of BancShares starting with the interest payment due March 15, 2025.

•$400 million aggregate principal amount of 6.125% fixed rate subordinated notes with a maturity date of March 2028 and $100 million aggregate principal amount of 4.125% fixed-to-fixed rate subordinated notes with a maturity date of November 2029, which were assumed by BancShares as part of the CIT Merger.

•$132 million in junior subordinated debentures representing obligations to Macon Capital Trust I, SCB Capital Trust I, FCB/SC Capital Trust II, and FCB/NC Capital Trust III special purpose entities and grantor trusts (the “Trusts”) for trust preferred securities. The Trusts had outstanding trust preferred securities of $128 million at September 30, 2022 and December 31, 2021, which mature in 2034, 2034, 2034 and 2036, respectively, and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.

Secured Borrowings

At September 30, 2022, BancShares had pledged $26.6 billion of loans to several financing facilities.

Notes Payable to FHLB

As a member of the FHLB, FCB can access financing based on an evaluation of its creditworthiness, statement of financial position, size and eligibility of collateral. Pledged assets related to these financings totaled $21.1 billion at September 30, 2022. FCB may at any time grant a security interest in, sell, convey or otherwise dispose of any of the assets used for collateral, provided that FCB is in compliance with the collateral maintenance requirement immediately following such disposition.

Other Secured Financings

Other secured (other than FHLB) financings were not significant and totaled $17 million at September 30, 2022. Pledged assets related to these financings totaled $17 million. These transactions do not meet accounting requirements for sales treatment and are recorded as secured borrowings.

At September 30, 2022, BancShares had other unused credit lines allowing contingent access to borrowings of up to $100 million on an unsecured basis.

Under borrowing arrangements with the FRB of Richmond, BancShares has access to an additional $4.5 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at September 30, 2022 and December 31, 2021. Assets pledged to the FRB of Richmond totaled $5.5 billion at September 30, 2022.

NOTE 13 — DERIVATIVE FINANCIAL INSTRUMENTS

BancShares acquired various derivative financial instruments in the CIT Merger. The following table presents notional amount and fair value of derivative financial instruments on a gross basis.

Notional Amount and Fair Value of Derivative Financial Instruments


dollars in millions	September 30, 2022
	Notional Amount		Asset Fair Value		Liability Fair Value




Derivatives not designated as hedging instruments (Non-qualifying hedges)
Interest rate contracts(1)(3)	$	18,604	$	143	$	(500)
Foreign exchange contracts	145		6		—
Other contracts(2)	769		—		—
Total derivatives not designated as hedging instruments	$	19,518	149		(500)
Gross derivatives fair values presented in the Consolidated Balance Sheets			149		(500)
Less: Gross amounts offset in the Consolidated Balance Sheets			—		—
Net amount presented in the Consolidated Balance Sheets			149		(500)
Less: Amounts subject to master netting agreements(4)			(6)		6
Less: Cash collateral pledged(received) subject to master netting agreements(5)			(129)		—
Total net derivative fair value			$	14	$	(494)

(1) Fair value balances include accrued interest.

(2) Other derivative contracts not designated as hedging instruments include risk participation agreements.

(3) BancShares accounts for swap contracts cleared by the Chicago Mercantile Exchange and LCH Clearnet as “settled-to-market”. As a result, variation margin payments are characterized as settlement of the derivative exposure and variation margin balances are netted against the corresponding derivative mark-to-market balances. Gross amounts of recognized assets and liabilities were lowered by $413 million and $20 million, respectively, at September 30, 2022.

(4) BancShares’ derivative transactions are governed by International Swaps and Derivatives Association (“ISDA”) agreements that allow for net settlements of certain payments as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. BancShares believes its ISDA agreements meet the definition of a master netting arrangement or similar agreement for purposes of the above disclosure.

(5) In conjunction with the ISDA agreements described above, BancShares has entered into collateral arrangements with its counterparties, which provide for the exchange of cash depending on change in the market valuation of the derivative contracts outstanding. Such collateral is available to be applied in settlement of the net balances upon an event of default of one of the counterparties. Collateral pledged or received is included in other assets or other liabilities, respectively.

Non-Qualifying Hedges

The following table presents gains of non-qualifying hedges recognized on the Condensed Consolidated Statements of Income:

Gains on Non-Qualifying Hedges


dollars in millions		Three Months Ended September 30,				Nine Months Ended September 30,
	Amounts Recognized	2022		2021		2022		2021
Interest rate contracts	Other noninterest income	$	5	$	—	$	11	$	—
Foreign currency forward contracts	Other noninterest income	20		—		26		—

Total non-qualifying hedges - income statement impact		$	25	$	—	$	37	$	—

NOTE 14 — OTHER LIABILITIES

The following table presents the components of other liabilities. The increases from December 31, 2021 primarily reflect the other liabilities assumed in the CIT Merger.

Other Liabilities


dollars in millions	September 30, 2022		December 31, 2021
Accrued expenses and accounts payable	$	295	$	5
Lease liabilities	373		64
Fair value of derivative financial instruments	500		1
Commitments to fund tax credit investments	264		43
Deferred taxes	173		33
Reserve for off-balance sheet credit exposure	91		12
Incentive plan liabilities	199		84
Accrued interest payable	35		8
Other	504		131
Total other liabilities	$	2,434	$	381

NOTE 15 — FAIR VALUE

Fair Value Hierarchy

BancShares measures certain financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels.

Assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy for an asset or liability is based on the lowest level of input significant to the fair value measurement with Level 1 inputs considered highest and Level 3 inputs considered lowest. A brief description of each input level follows:

•Level 1 inputs are quoted prices in active markets for identical assets and liabilities.

•Level 2 inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices observable for the assets or liabilities and market corroborated inputs.

•Level 3 inputs are unobservable inputs for the asset or liability. These unobservable inputs and assumptions reflect the estimates market participants would use in pricing the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes BancShares’ assets and liabilities measured at estimated fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value - Recurring Basis (dollars in millions)


dollars in millions	September 30, 2022
	Total		Level 1		Level 2		Level 3
Assets
Investment securities available for sale
U.S. Treasury	$	1,900	$	—	$	1,900	$	—
Government agency	173		—		173		—
Residential mortgage-backed securities	4,784		—		4,784		—
Commercial mortgage-backed securities	1,673		—		1,673		—
Corporate bonds	558		—		382		176

Total investment securities available for sale	$	9,088	$	—	$	8,912	$	176
Marketable equity securities	92		30		62		—
Loans held for sale	7		—		7		—
Derivative assets(1)
Interest rate contracts — non-qualifying hedges	143		—		142		1
Other derivative — non-qualifying hedges	6		—		6		—
Total derivative assets	$	149	$	—	$	148	$	1
Liabilities
Derivative liabilities(1)
Interest rate contracts — non-qualifying hedges	$	500	$	—	$	500	$	—
Other derivative— non-qualifying hedges	—		—		—		—
Total derivative liabilities	$	500	$	—	$	500	$	—

	December 31, 2021
dollars in millions	Total		Level 1		Level 2		Level 3
Assets
Investment securities available for sale
U.S. Treasury	$	2,005	$	—	$	2,005	$	—
Government agency	221		—		221		—
Residential mortgage-backed securities	4,729		—		4,729		—
Commercial mortgage-backed securities	1,640		—		1,640		—
Corporate bonds	608		—		401		207
Total investment securities available for sale	$	9,203	$	—	$	8,996	$	207
Marketable equity securities	98		34		64		—
Loans held for sale	99		—		99		—

(1) Derivative fair values include accrued interest.

The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a recurring basis are as follows:

Investment securities available for sale. The fair value of U.S. Treasury, government agency, mortgage-backed securities, and a portion of the corporate bonds are generally estimated using a third-party pricing service. To obtain an understanding of the processes and methodologies used, management reviews correspondence from the third-party pricing service. Management also performs a price variance analysis process to corroborate the reasonableness of prices. The third-party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models which use a variety of inputs, such as benchmark yields, reported trades, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. The remaining corporate bonds held are generally measured at fair value based on indicative bids from broker-dealers using inputs that are not directly observable. These securities are classified as Level 3.

Marketable equity securities. Equity securities are measured at fair value using observable closing prices. The valuation also considers the amount of market activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded in an active market and as Level 2 if the observable closing price is from a less than active market.

Loans held for sale. Certain residential real estate loans originated to be sold to investors are carried at fair value based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are considered Level 2 inputs.

Derivative Assets and Liabilities. Derivatives were valued using models that incorporate inputs depending on the type of derivative. Other than the fair value of credit derivatives, which were estimated using Level 3 inputs, most derivative instruments were valued using Level 2 inputs based on observed pricing for similar assets and liabilities and model-based valuation techniques for which all significant assumptions are observable in the market. See Note 13 — Derivative Financial Instruments for notional principal amounts and fair values.

The following tables summarize information about significant unobservable inputs related to BancShares’ categories of Level 3 financial assets and liabilities measured on a recurring basis.

Quantitative Information About Level 3 Fair Value Measurements - Recurring Basis

dollars in millions

Financial Instrument

Estimated
Fair Value

Valuation
Technique(s)

Significant Unobservable Inputs

September 30, 2022

Assets

Corporate bonds

176

Indicative bid provided by broker

Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer.

Interest rate & other derivative — non-qualifying hedges

Internal valuation model

Not material

December 31, 2021

Assets

Corporate bonds

207

Indicative bid provided by broker

Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer.

The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3).

Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities - Recurring Basis


dollars in millions	Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
	Corporate Bonds		Other Derivative Assets — Non-Qualifying		Other Derivative Liabilities — Non-Qualifying		Corporate Bonds
Beginning balance	$	207	$	—	$	—	$	317
Purchases	—		—		1		31
Included in earnings	—		1		(1)		2
Included in comprehensive income	(17)		—		—		4

Transfers out	(14)		—		—		—
Maturity and settlements	—		—		—		(46)
Ending balance	$	176	$	1	$	—	$	308

Fair Value Option

The following table summarizes the difference between the aggregate fair value and the UPB for residential real estate loans originated for sale measured at fair value as of September 30, 2022 and December 31, 2021.


dollars in millions	September 30, 2022
	Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	7	$	7	$	—

	December 31, 2021
	Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	99	$	96	$	3

BancShares has elected the fair value option for residential real estate loans originated for sale. This election reduces certain timing differences in the Consolidated Statements of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value were recorded as a component of mortgage income and included a loss of $1 million for each of the three months ended September 30, 2022 and 2021 and a loss of $3 million for each of the nine months ended September 30, 2022 and 2021. Interest earned on loans held for sale is recorded within interest income on loans and leases in the Consolidated Statements of Income.

No originated loans held for sale were 90 or more days past due or on non-accrual status as of September 30, 2022 or December 31, 2021.

Assets Measured at Estimated Fair Value on a Non-recurring Basis

Certain assets or liabilities are required to be measured at estimated fair value on a non-recurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. The following table presents carrying value of assets measured at estimated fair value on a non-recurring basis for which gains and losses from a non-recurring fair value adjustment have been recorded in the periods. The gains and losses reflect amounts recorded for the respective periods, regardless of whether the asset is still held at period end.

Assets Measured at Fair Value - Non-recurring Basis


dollars in millions	Fair Value Measurements
	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
September 30, 2022
Assets held for sale - loans	$	3	$	—	$	—	$	3	$	(1)
Loans - collateral dependent loans	78		—		—		78		(10)
Other real estate owned	51		—		—		51		13
Mortgage servicing rights	—		—		—		—		1
Total	$	132	$	—	$	—	$	132	$	3
December 31, 2021
Loans - collateral dependent loans	$	3	$	—	$	—	$	3	$	(2)
Other real estate owned	34		—		—		34		(4)
Mortgage servicing rights	22		—		—		22		3
Total	$	59	$	—	$	—	$	59	$	(3)

Certain other assets are adjusted to their fair value on a non-recurring basis, including certain loans, OREO, and goodwill, which are periodically tested for impairment, and MSRs, which are carried at the lower of amortized cost or market. Most loans held for investment, deposits, and borrowings are not reported at fair value.

The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a non-recurring basis are as follows:

Assets held for sale - loans. Loans held for investment subsequently transferred to held for sale are carried at the lower of cost or market. When available, the fair values for the transferred loans are based on quoted prices from the purchase commitments for the individual loans being transferred and are considered Level 1 inputs. The fair value of Level 2 assets was primarily estimated based on prices of recent trades of similar assets. For other loans held for sale, the fair value of Level 3 assets was primarily measured under the income approach using the discounted cash flow model based on Level 3 inputs including discount rate or the price of committed trades.

Loans - collateral dependent loans. The population of Level 3 loans measured at fair value on a non-recurring basis includes collateral-dependent loans evaluated individually. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, and immaterial adjustments for other external factors that may impact the marketability of the collateral.

Other real estate owned. OREO is carried at the lower of cost or fair value. OREO asset valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts, generally between 6% and 15%, applied for estimated selling costs and other external factors that may impact the marketability of the property. At September 30, 2022 and December 31, 2021, the weighted average discount applied was 6.82% and 8.79%, respectively. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals are ordered to ensure the reported values reflect the most current information.

Mortgage servicing rights. MSRs are carried at the lower of amortized cost or market and are, therefore, carried at fair value only when fair value is less than amortized cost. The fair value of MSRs is determined using a pooling methodology. Similar loans are pooled together and a discounted cash flow model, which takes into consideration discount rates, prepayment rates, and the weighted average cost to service the loans, is used to determine the fair value.

Financial Instruments Fair Value

The table below presents the carrying values and estimated fair values for financial instruments, excluding leases and certain other assets and liabilities for which these disclosures are not required.

Carrying Values and Fair Values of Financial Assets and Liabilities


dollars in millions	September 30, 2022
			Estimated Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	481	$	481	$	—	$	—	$	481
Interest earning deposits at banks	6,172		6,172		—		—		6,172
Investment in marketable equity securities	92		30		62		—		92
Investment securities available for sale	9,088		—		8,912		176		9,088
Investment securities held to maturity	9,661		—		8,166		—		8,166
Loans held for sale	18		—		7		14		21
Net loans	66,757		—		1,612		61,280		62,892
Accrued interest receivable	286		—		286		—		286
Federal Home Loan Bank stock	234		—		234		—		234

Mortgage and other servicing rights	26		—		—		48		48
Derivative assets	149		—		148		1		149
Financial Liabilities
Deposits	87,553		—		87,435		—		87,435

Credit balances of factoring clients	1,147		—		—		1,147		1,147
Securities sold under customer repurchase agreements	578		—		578		—		578
Other short-term borrowings	2,550		—		2,550		—		2,550
Long-term borrowings	5,207		—		5,042		17		5,059
Accrued interest payable	35		—		35		—		35
Derivative liabilities	500		—		500		—		500

	December 31, 2021
			Estimated Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	338	$	338	$	—	$	—	$	338
Interest earning deposits at banks	9,115		9,115		—		—		9,115
Investment in marketable equity securities	98		34		64		—		98
Investment securities available for sale	9,203		—		8,996		207		9,203
Investment securities held to maturity	3,809		—		3,759		—		3,759
Loans held for sale	99		—		99		—		99
Net loans	32,193		—		—		31,890		31,890
Accrued interest receivable	134		—		134		—		134
Federal Home Loan Bank stock	40		—		40		—		40

Mortgage and other servicing rights	23		—		—		23		23
Financial Liabilities
Deposits with no stated maturity	48,925		—		48,925		—		48,925
Time deposits	2,481		—		2,471		—		2,471
Securities sold under customer repurchase agreements	589		—		589		—		589

Long-term borrowings	1,195		—		1,222		—		1,222



Accrued interest payable	8		—		8		—		8

The methods and assumptions used to estimate the fair value of each class of financial instruments not discussed elsewhere are as follows:

Net loans. The carrying value of net loans is net of the ACL. Loans are generally valued by discounting expected cash flows using market inputs with adjustments based on cohort level assumptions for certain loan types as well as internally developed estimates at a business segment level. Due to the significance of the unobservable market inputs and assumptions, as well as the absence of a liquid secondary market for most loans, these loans are classified as Level 3. Certain loans are measured based on observable market prices sourced from external data providers and classified as Level 2. Nonaccrual loans are written down and reported at their estimated recovery value which approximates their fair value and classified as Level 3.

Investment securities held to maturity. BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the World Bank and FDIC guaranteed CDs with other financial institutions. We primarily use prices obtained from pricing services to determine the fair value of securities, which are Level 2 inputs.

FHLB stock. The carrying amount of FHLB stock is a reasonable estimate of fair value, as these securities are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value. BancShares considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. BancShares investment in FHLB stock is ultimately recoverable at par. The inputs used in the fair value measurement for the FHLB stock are considered Level 2 inputs.

Mortgage and other servicing rights. Mortgage and other servicing rights are initially recorded at fair value and subsequently carried at the lower of amortized cost or market. Therefore, servicing rights are carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage and other servicing rights is determined using a pooling methodology. Similar loans are pooled together and a model which relies on discount rates, estimates of prepayment rates and the weighted average cost to service the loans is used to determine the fair value. The inputs used in the fair value measurement for mortgage and other servicing rights are considered Level 3 inputs.

Deposits. The estimated fair value of deposits with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts was the amount payable on demand at the reporting date. The fair value of time deposits was estimated based on a discounted cash flow technique using Level 2 inputs appropriate to the contractual maturity.

Credit balances of factoring clients. The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is inconsequential due to the short term nature of these balances, therefore, the fair value approximated carrying value, and the credit balances were classified as Level 3

Short-term borrowed funds. Includes federal funds purchased, repurchase agreements and certain other short-term borrowings and payables. The fair value approximates carrying value and are classified as Level 2.

Long-term Borrowings. For borrowings, the fair values are determined based on recent trades or sales of the actual security, if available. Otherwise, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for FHLB borrowings, senior and subordinated debentures, and other borrowings are considered Level 2 inputs. The fair value of other secured borrowings was estimated based on unobservable inputs and are classified as Level 3.

For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 2022 and December 31, 2021. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short-term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks, and interest earning deposits at banks, are classified on the fair value hierarchy as Level 1. Accrued interest receivable and accrued interest payable are classified as Level 2.

NOTE 16 — STOCKHOLDERS' EQUITY

A roll forward of common stock activity is presented in the following table.

Number of Shares of Common Stock


	Outstanding
	Class A	Class B
Common stock - June 30, 2022	14,997,202	1,005,185
Shares purchased under authorized repurchase plan	(1,027,414)	—
Restricted stock units vested, net of shares held to cover taxes	1,156	—
Common stock - September 30, 2022	13,970,944	1,005,185


	Outstanding
	Class A	Class B
Common stock - December 31, 2021	8,811,220	1,005,185
Common stock issuance - CIT Merger	6,140,010	—
Restricted stock units vested, net of shares held to cover taxes	47,128	—
Shares purchased under authorized repurchase plan	(1,027,414)	—
Common stock - September 30, 2022	13,970,944	1,005,185

Common Stock

The Parent Company has Class A Common Stock and Class B Common Stock. Class A Common Stock have one vote per share, while shares of Class B Common Stock have 16 votes per share. In connection with the consummation of the CIT Merger, the Parent Company issued approximately 6.1 million shares of Class A Common Stock as further discussed in Note 2 — Business Combinations.

Restricted Stock Units

Refer to Note 21 — Employee Benefit Plans for discussion of the BancShares RSUs.

Non-Cumulative Perpetual Preferred Stock

On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares (the “Depositary Shares”), each representing a 1/40th interest in a share of 5.375% non-cumulative perpetual preferred stock, series A (“BancShares Series A Preferred Stock”) (equivalent to $1,000 per share of the BancShares Series A Preferred Stock) for a total of $345 million. As part of the CIT Merger, each issued and outstanding share of CIT Series A Preferred Stock and CIT Series B Preferred Stock automatically converted into the right to receive one share of BancShares Series B Preferred Stock and BancShares Series C Preferred Stock, respectively, having such rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, that were not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, of the CIT Series A Preferred Stock and the CIT Series B Preferred Stock, respectively. The following table summarizes BancShares’ non-cumulative perpetual preferred stock.


dollars in millions, except per share and par value data
Preferred Stock	Issuance Date	Earliest Redemption Date	Par Value	Shares Authorized, Issued and Outstanding	Liquidation Preference Per Share		Total Liquidation Preference		Dividend	Dividend Payment Dates
Series A	March 12, 2020	March 15, 2025	$0.01	345,000	$	1,000	$	345	5.375%	Quarterly in arrears, beginning June 15, 2020
Series B	January 3, 2022	January 4, 2027	$0.01	325,000	1,000		325		5.8%, converting to LIBOR + 3.972% beginning June 15, 2022	Semi-annually during the fixed rate period, then quarterly in arrears, beginning June 15, 2022
Series C	January 3, 2022	January 4, 2027	$0.01	8,000,000	25		200		5.625%	Quarterly in arrears, beginning March 15, 2022

Dividends on BancShares Series A, B, and C Preferred Stock (together, “BancShares Preferred Stock”) will be paid when, as, and if declared by the Board of Directors of the Parent Company, or a duly authorized committee thereof, to the extent that the Parent Company has lawfully available funds to pay dividends. If declared, dividends with respect to the BancShares Series A Preferred Stock and BancShares Series C Preferred Stock will accrue and be payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year, beginning on the “Dividend Payment Dates” in the table above. Dividends on the BancShares Series B Preferred Stock initially accrued and were payable on a semi-annual basis during the fixed rate period. Upon expiration of the fixed rate period on June 15, 2022, dividends with respect to the BancShares Series B Preferred Stock, if declared, now accrue and are payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year. Dividends on the BancShares Preferred Stock will not be cumulative.

The Parent Company may redeem the BancShares Preferred Stock at its option, and subject to any required regulatory approval, at a redemption price equal to the “Liquidation Preference Per Share” in the table above, plus any declared and unpaid dividends to, but excluding, the redemption date, (i) in whole or in part, from time to time, on any dividend payment date on or after the “Earliest Redemption Date” in the table above, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event.

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table details the components of Accumulated Other Comprehensive (Loss) Income (“AOCI”):

Components of Accumulated Other Comprehensive Income (Loss)


dollars in millions	September 30, 2022						December 31, 2021
	Gross Unrealized		Income Taxes		Net Unrealized		Gross Unrealized		Income Taxes		Net Unrealized
Unrealized loss on securities available for sale	$	(995)	$	239	$	(756)	$	(12)	$	3	$	(9)
Unrealized loss on securities available for sale transferred to securities held to maturity	(8)		2		(6)		(9)		2		(7)
Defined benefit pension items	43		(10)		33		34		(8)		26


Total accumulated other comprehensive (loss) income	$	(960)	$	231	$	(729)	$	13	$	(3)	$	10

The following table details the changes in the components of AOCI, net of income taxes:

Changes in Accumulated Other Comprehensive Income (Loss) by Component


dollars in millions	Unrealized (loss) gain on securities available for sale		Unrealized loss on securities available for sale transferred to securities held to maturity		Net change in Defined Benefit Pension Items		Total AOCI
Balance as of December 31, 2021	$	(9)	$	(7)	$	26	$	10
AOCI activity before reclassifications	(747)		—		—		(747)
Amounts reclassified from AOCI	—		1		7		8
Net current period AOCI	(747)		1		7		(739)
Balance as of September 30, 2022	$	(756)	$	(6)	$	33	$	(729)

Balance as of December 31, 2020	$	79	$	4	$	(71)	$	12
AOCI activity before reclassifications	(33)		—		—		(33)
Amounts reclassified from AOCI	(26)		(1)		16		(11)
Net current period AOCI	(59)		(1)		16		(44)
Balance as of September 30, 2021	$	20	$	3	$	(55)	$	(32)

Other Comprehensive Income

The amounts included in the Condensed Consolidated Statements of Comprehensive Income are net of income taxes. The following table presents the pretax and after-tax components of other comprehensive income.

Other Comprehensive Income (Loss) by Component


dollars in millions	Three Months Ended September 30,
	2022						2021
	Gross Amount		Tax		Net Amount		Gross Amount		Tax		Net Amount		Income Statement Line Item





Net change in pension obligations
AOCI activity before reclassification	$	—	$	—	$	—	$	—	$	—	$	—
Reclassifications out of AOCI	2		—		2		7		(1)		6		Other noninterest expense
Net Change	$	2	$	—	$	2	$	7	$	(1)	$	6

Unrealized loss on securities available for sale transferred to securities held to maturity
AOCI activity before reclassification	$	—	$	—	$	—	$	—	$	—	$	—
Reclassifications out of AOCI	—		—		—		(1)		—		(1)		Interest on investment securities
Net Change	$	—	$	—	$	—	$	(1)	$	—	$	(1)

Unrealized loss on securities available for sale
AOCI activity before reclassification	$	(348)	$	82	$	(266)	$	(11)	$	3	$	(8)
Reclassifications out of AOCI	—		—		—		(8)		1		(7)		Realized gain on sales of investment securities available for sale, net
Net Change	$	(348)	$	82	$	(266)	$	(19)	$	4	$	(15)
Net current period AOCI	$	(346)	$	82	$	(264)	$	(13)	$	3	$	(10)

	Nine Months Ended September 30,
	2022						2021

	Gross Amount		Tax		Net Amount		Gross Amount		Tax		Net Amount		Income Statement Line Item





Net change in pension obligations
AOCI activity before reclassification	$	—	$	—	$	—	$	—	$	—	$	—
Reclassifications out of AOCI	9		(2)		7		20		(4)		16		Other noninterest expense
Net Change	$	9	$	(2)	$	7	$	20	$	(4)	$	16

Unrealized loss on securities available for sale transferred to securities held to maturity
AOCI activity before reclassification	$	—	$	—	$	—	$	—	$	—	$	—
Reclassifications out of AOCI	1		—		1		(1)		—		(1)		Interest on investment securities
Net Change	$	1	$	—	$	1	$	(1)	$	—	$	(1)

Unrealized loss on securities available for sale
AOCI activity before reclassification	$	(983)	$	236	$	(747)	$	(43)	$	10	$	(33)
Reclassifications out of AOCI	—		—		—		(33)		7		(26)		Realized gain on sales of investment securities available for sale, net
Net Change	$	(983)	$	236	$	(747)	$	(76)	$	17	$	(59)
Net current period AOCI	$	(973)	$	234	$	(739)	$	(57)	$	13	$	(44)

NOTE 18 — REGULATORY CAPITAL

BancShares and FCB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the BancShares’ Consolidated Financial Statements. Certain activities, such as the ability to undertake new business initiatives, including acquisitions, the access to and cost of funding for new business initiatives, the ability to pay dividends, the ability to repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight, largely depend on a financial institution’s capital strength.

Federal banking agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening previous capital requirements for banking organizations. Basel III became effective for BancShares on January 1, 2015 and the associated capital conservation buffers of 2.5% were fully phased in by January 1, 2019.

The following table includes the Basel III requirements for regulatory capital ratios.


	Basel III Minimums		Basel III Conservation Buffers		Basel III Requirements
Regulatory capital ratios
Total risk-based capital	8.00	%	2.50	%	10.50	%
Tier 1 risk-based capital	6.00		2.50		8.50
Common equity Tier 1	4.50		2.50		7.00
Tier 1 leverage	4.00		—		4.00

The FDIC also has Prompt Corrective Action (“PCA”) thresholds for regulatory capital ratios. The regulatory capital ratios for BancShares and FCB are calculated in accordance with the guidelines of the federal banking authorities. The regulatory capital ratios for BancShares and FCB exceed the Basel III requirements and the PCA well-capitalized thresholds as of September 30, 2022 and December 31, 2021 as summarized in the following table.


dollars in millions					September 30, 2022				December 31, 2021
	Basel III Requirements		PCA well-capitalized thresholds		Amount		Ratio		Amount		Ratio
BancShares
Total risk-based capital	10.50	%	10.00	%	$	11,927	13.46	%	$	5,042	14.35	%
Tier 1 risk-based capital	8.50		8.00		10,066		11.36		4,380		12.47
Common equity Tier 1	7.00		6.50		9,185		10.37		4,041		11.50
Tier 1 leverage	4.00		5.00		10,066		9.31		4,380		7.59
FCB
Total risk-based capital	10.50	%	10.00	%	$	11,732	13.26	%	$	4,858	13.85	%
Tier 1 risk-based capital	8.50		8.00		10,327		11.67		4,651		13.26
Common equity Tier 1	7.00		6.50		10,327		11.67		4,651		13.26
Tier 1 leverage	4.00		5.00		10,327		9.56		4,651		8.07

At September 30, 2022, BancShares and FCB had total risk-based capital ratio conservation buffers of 5.36% and 5.26%, respectively, which are in excess of the fully phased in Basel III conservation buffer of 2.50%. At December 31, 2021, BancShares and FCB had risk-based capital ratio conservation buffers of 6.35% and 5.85%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratio as of September 30, 2022 and December 31, 2021 over the Basel III minimum.

Additional Tier 1 capital for BancShares includes preferred stock discussed further in Note 16 — Stockholders’ Equity. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt.

Dividend Restrictions

Dividends paid from FCB to the Parent Company are the primary source of funds available to the Parent Company for payment of dividends to its stockholders. The Board of Directors of FCB may approve distributions, including dividends, as it deems appropriate, subject to the requirements of the FDIC and the General Statutes of North Carolina, provided that the distributions do not reduce the regulatory capital ratios below the applicable requirements. FCB could have paid additional dividends to the Parent Company in the amount of $2.9 billion while continuing to meet the requirements for well-capitalized banks at September 30, 2022. Dividends declared by FCB and paid to the Parent Company amounted to $930 million for the nine months ended September 30, 2022. Payment of dividends is made at the discretion of FCB’s Board of Directors and is contingent upon satisfactory earnings as well as projected capital needs.

NOTE 19 — EARNINGS PER COMMON SHARE

The following table sets forth the computation of the basic and diluted earnings per common share:

Earnings per Common Share


dollars in millions, except per share data	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	315	$	124	$	841	$	424
Preferred stock dividends	12		5		36		14
Net income available to common stockholders	$	303	$	119	$	805	$	410
Weighted average common shares outstanding
Basic shares outstanding	15,711,976		9,816,405		15,849,219		9,816,405
Stock-based awards	16,017		—		18,095		—
Diluted shares outstanding	15,727,993		9,816,405		15,867,314		9,816,405
Earnings per common share
Basic	$	19.27	$	12.17	$	50.76	$	41.79
Diluted	$	19.25	$	12.17	$	50.70	$	41.79

BancShares RSUs are discussed in Note 21 — Employee Benefit Plans.

NOTE 20 — INCOME TAXES

BancShares’ global effective income tax rate was 22.9% and 13.3% for the three and nine months ended September 30, 2022, respectively, and 21.5% and 22.6% for the three and nine months ended September 30, 2021, respectively. The increase in the income tax rate for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily driven by the increase in state and local taxes resulting from the CIT Merger. The decrease in the income tax rate for the nine months ended September 30, 2022 from the nine months ended September 30, 2021 was primarily driven by the non-taxable nature of the bargain purchase gain arising from the CIT Merger.

The quarterly income tax expense is based on a projection of BancShares’ annual effective tax rate (“ETR”). This annual ETR is applied to the year-to-date consolidated pre-tax income to determine the interim provision for income taxes before discrete items. The ETR each period is also impacted by a number of factors, including the relative mix of domestic and international earnings, effects of changes in enacted tax laws, adjustments to the valuation allowances, and discrete items. The currently forecasted ETR may vary from the actual year-end 2022 ETR due to the changes in these factors.

Uncertain Tax Benefits

BancShares’ recognizes tax benefits when it is more likely than not that the position will prevail, based solely on the technical merits under the tax law of the relevant jurisdiction. BancShares will recognize the tax benefit if the position meets this recognition threshold determined based on the largest amount of the benefit that is more than likely to be realized.

Net Operating Loss Carryforwards and Valuation Adjustments

As a result of the CIT Merger, BancShares’ net deferred tax liabilities increased by approximately $297 million. That amount included an increase to deferred tax assets (“DTAs”) primarily from net operating losses, capitalized costs and tax credits net of deferred tax liabilities primarily from operating leases.

BancShares’ ability to recognize DTAs is evaluated on a quarterly basis to determine if there are any significant events that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, valuation adjustments may be adjusted accordingly.

NOTE 21 — EMPLOYEE BENEFIT PLANS

BancShares sponsors non-contributory defined benefit pension plans for its qualifying employees. The service cost component of net periodic benefit cost is included in salaries and wages while all other non-service cost components are included in other noninterest expense.

The components of net periodic benefit cost are as follows:


dollars in millions	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Service cost	$	3	$	4	$	10	$	12
Interest cost	11		7		33		22
Expected return on assets	(22)		(20)		(65)		(59)
Amortization of prior service cost	—		—		—		—
Amortization of net actuarial loss	3		7		9		20
Net periodic benefit	$	(5)	$	(2)	$	(13)	$	(5)

No discretionary contribution was made to the pension plans during the nine months ended September 30, 2022. The funding policy of the pension plans is to contribute an amount each year to meet all Employee Retirement Income Security Act minimum requirements, including amounts to meet quarterly funding requirements, avoid “at-risk” status and avoid any benefit restrictions. BancShares may also contribute additional voluntary amounts each year (up to the maximum tax-deductible amount) in order to achieve certain target funding levels in the plans, with consideration also given to current and future cash flow and tax positions. No contributions are currently expected for the year ending December 31, 2022.

Certain retirement benefit plans and stock-based awards of CIT were acquired by BancShares upon the closing of the CIT Merger.

CIT had both funded and unfunded noncontributory defined benefit pension and postretirement plans covering certain U.S. and non-U.S. employees, each of which was designed in accordance with the practices and regulations in the related countries. CIT maintained a frozen U.S. non-contributory pension plan (the "Plan") qualified under the Internal Revenue Code (“IRC”). CIT also maintained a frozen U.S. non-contributory supplemental retirement plan (the "Supplemental Plan”), and an Executive Retirement Plan, which had been closed to new members since 2006, and whose participants were all inactive. Accumulated balances under the Plan and the Supplemental Plan continue to receive periodic interest, subject to certain government limits. Fair value of the plan assets and benefit obligation at December 31, 2021 were $387 million and $409 million, respectively.

CIT provided healthcare and life insurance benefits to eligible retired employees. For most eligible retirees, healthcare was contributory and life insurance was non-contributory. All postretirement benefit plans were funded on a pay-as-you-go basis. These plans were terminated in the first quarter of 2022, effective April 1, and BancShares recognized a reduction in other noninterest expenses of approximately $27 million in the first quarter of 2022 related to amounts previously accrued.

CIT had a defined contribution retirement plan covering certain of its U.S. employees that qualifies under section 401(k) of the IRC and was assumed by BancShares. Under this plan employees may contribute a portion of their eligible compensation, as defined, subject to regulatory limits and plan provisions, and BancShares matches these contributions up to a threshold. Participants are also eligible for an additional discretionary company contribution.

In February 2016, CIT adopted the CIT Group Inc. 2016 Omnibus Incentive Plan (the "2016 Plan"), which provided for grants of stock-based awards to employees, executive officers, and directors. The BancShares RSUs are the only outstanding awards subject to the terms of the 2016 Plan and no further awards will be made under the 2016 Plan. Compensation expense is recognized over the vesting period or the requisite service period, which is generally three years for BancShares RSUs, under the graded vesting method, whereby each vesting tranche of the award is amortized separately as if each were a separate award.

CIT had compensation awards that either converted to BancShares RSUs or immediately vested at completion of the CIT Merger as further described in the “Stock-Based Compensation” discussion in Note 1 — Accounting Policies and Basis of Presentation. The following table presents the unvested BancShares RSUs at September 30, 2022, which have vesting periods through 2024. There were no grants of stock-based compensation awards during 2022.

Stock-Settled Awards Outstanding


per share amounts in whole dollars	Stock-Settled Awards
	Number of Shares	Weighted Average Grant Date Value
Unvested BancShares at December 31, 2021	—	$	—
Unvested CIT RSUs converted to BancShares RSUs at Merger Date	116,958	859.76
Unvested CIT PSUs converted to RSUs at Merger Date	10,678	859.76
Forfeited / cancelled	(4,922)	859.76
Vested / settled awards	(74,500)	859.76

Unvested BancShares RSUs at September 30, 2022	48,214	$	859.76

NOTE 22 — BUSINESS SEGMENT INFORMATION

As of December 31, 2021, BancShares managed its business and reported its financial results as a single segment. BancShares began reporting multiple segments during the first quarter of 2022. BancShares now has three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. BancShares conformed the comparative prior periods presented to reflect the new segments. The substantial majority of BancShares’ operations for historical periods prior to completion of the CIT Merger are included in the General Banking segment. The Commercial Banking and Rail segments primarily relate to operations acquired in the CIT Merger. BancShares' reportable segments are primarily based upon industry categories, target markets, distribution channels and customers served, and, to a lesser extent, the core competencies relating to product origination, operations and servicing and the nature of their regulatory environment. Segment reporting is reflective of BancShares' internal reporting structure and is consistent with the presentation of financial information to the chief operating decision maker. Each of the segments are described below.

General Banking

General Banking delivers services to individuals and businesses through an extensive branch network, digital banking, telephone banking and various ATM networks, including a full suite of deposit products, loans (primarily residential mortgages and commercial loans), and various fee-based services. General Banking also provides: a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services; and deposit, cash management and lending to homeowner associations (“HOA”) and property management companies. As part of the CIT Merger, Community Association Banking (“CAB”) products were added that will drive the associated HOA deposit channel. Revenue is primarily generated from interest earned on residential mortgages, small business loans and fees for banking services.

Commercial Banking

Commercial Banking provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across select industries. Commercial Banking also provides asset-based lending, factoring, receivables management products and supply chain financing. Revenue is primarily generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities and banking services, along with capital markets transactions and commissions earned on factoring and related activities.

Rail

Rail offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts, and center beams and flat cars for lumber. Revenue is primarily from operating lease income.

Corporate

Certain items that are not allocated to operating segments are included in the Corporate segment. Some of the more significant and recurring items include interest income on investment securities, a portion of interest expense primarily related to corporate funding costs (including brokered deposits), income on BOLI (other noninterest income), merger-related costs, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporate also includes certain significant items that are infrequent, such as: the Initial Non-PCD Provision for loans and leases and unfunded commitments; and the preliminary gain on acquisition, each of which are related to the CIT Merger.

Segment Net Income (Loss) and Select Period End Balances

The following table presents the condensed income statement by segment.


dollars in millions	Three Months Ended September 30, 2022
	General Banking		Commercial Banking		Rail		Corporate		Total BancShares
Net interest income (expense)	$	495	$	230	$	(20)	$	90	$	795
Provision for credit losses	2		58		—		—		60
Net interest income (expense) after provision for credit losses	493		172		(20)		90		735
Noninterest income	118		133		170		12		433
Noninterest expense	410		186		110		54		760
Income before income taxes	201		119		40		48		408
Income tax expense	55		25		10		3		93
Net income	$	146	$	94	$	30	$	45	$	315
Select Period End Balances

Loans and leases	$	41,693	$	28,023	$	74	$	—	$	69,790
Deposits	82,730		3,682		14		1,127		87,553
Operating lease equipment, net	—		736		7,248		—		7,984

	Three Months Ended September 30, 2021
	General Banking		Commercial Banking		Rail		Corporate		Total BancShares
Net interest income (expense)	$	363	$	5	$	—	$	(21)	$	347
Benefit for credit losses	(1)		—		—		—		(1)
Net interest income (expense) after benefit for credit losses	364		5		—		(21)		348
Noninterest income	110		—		—		14		124
Noninterest expense	295		1		—		18		314
Income (loss) before income taxes	179		4		—		(25)		158
Income tax expense (benefit)	38		1		—		(5)		34
Net income (loss)	$	141	$	3	$	—	$	(20)	$	124
Select Period End Balances

Loans and leases	$	31,849	$	667	$	—	$	—	$	32,516
Deposits	49,992		73		—		—		50,065
Operating lease equipment, net	—		—		—		—		—


dollars in millions	Nine Months Ended September 30, 2022
	General Banking		Commercial Banking		Rail		Corporate		Total BancShares
Net interest income (expense)	$	1,400	$	641	$	(58)	$	161	$	2,144
(Benefit) provision for credit losses	(7)		60		—		513		566
Net interest income (expense) after provision for credit losses	1,407		581		(58)		(352)		1,578
Noninterest income	365		376		493		473		1,707
Noninterest expense	1,210		557		320		228		2,315
Income (loss) before income taxes	562		400		115		(107)		970
Income tax expense (benefit)	134		90		28		(123)		129
Net income	$	428	$	310	$	87	$	16	$	841

	Nine Months Ended September 30, 2021
	General Banking		Commercial Banking		Rail		Corporate		Total BancShares
Net interest income (expense)	$	1,071	$	12	$	—	$	(50)	$	1,033
Benefit for credit losses	(32)		—		—		—		(32)
Net interest income (expense) after benefit for credit losses	1,103		12		—		(50)		1,065
Noninterest income	325		—		—		69		394
Noninterest expense	875		3		—		33		911
Income (loss) before income taxes	553		9		—		(14)		548
Income tax expense (benefit)	125		2		—		(3)		124
Net income (loss)	$	428	$	7	$	—	$	(11)	$	424

NOTE 23 — COMMITMENTS AND CONTINGENCIES

Commitments

To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments involve elements of credit, interest rate or liquidity risk and include commitments to extend credit and standby letters of credit.

The accompanying table summarizes credit-related commitments and other purchase and funding commitments:


dollars in millions	September 30, 2022		December 31, 2021
Financing Commitments
Financing assets (excluding leases)	$	23,373	$	13,011
Letters of Credit
Standby letters of credit	412		92
Other letters of credit	47		24
Deferred Purchase Agreements	2,152		—
Purchase and Funding Commitments(1)	922		—

(1) BancShares’ purchase and funding commitments relate to the equipment leasing businesses’ commitments to fund finance leases and operating leases, and Rail’s railcar manufacturer purchase and upgrade commitments.

Financing Commitments

Commitments to extend credit are legally binding agreements to lend to customers. These commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires collateral be pledged to secure the commitment, including cash deposits, securities and other assets.

Financing commitments, referred to as loan commitments or lines of credit, primarily reflect BancShares’ agreements to lend to its customers, subject to the customers’ compliance with contractual obligations. At September 30, 2022, substantially all undrawn financing commitments were senior facilities. Most of the undrawn and available financing commitments are in the Commercial Banking segment. Financing commitments also include approximately $67 million related to off-balance sheet commitments to fund equity investments. Commitments to fund equity investments are contingent on events that have yet to occur and may be subject to change.

As financing commitments may not be fully drawn, may expire unused, may be reduced or canceled at the customer’s request, and may require the customer to be in compliance with certain conditions, total commitment amounts do not necessarily reflect actual future cash flow requirements.

The table above excludes uncommitted revolving credit facilities extended by Commercial Services to its clients for working capital purposes. In connection with these facilities, Commercial Services has the sole discretion throughout the duration of these facilities to determine the amount of credit that may be made available to its clients at any time and whether to honor any specific advance requests made by its clients under these credit facilities.

Letters of Credit

Standby letters of credit are commitments to pay the beneficiary thereof if drawn upon by the beneficiary upon satisfaction of the terms of the letter of credit. Those commitments are primarily issued to support public and private borrowing arrangements. To mitigate its risk, BancShares’ credit policies govern the issuance of standby letters of credit. The credit risk related to the issuance of these letters of credit is essentially the same as in extending loans to clients and, therefore, these letters of credit are collateralized when necessary. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of amounts recognized in the Consolidated Balance Sheets.

Deferred Purchase Agreements (“DPA”)

A DPA is provided in conjunction with factoring, whereby a client is provided with credit protection for trade receivables without purchasing the receivables. The trade receivables terms generally require payment in 90 days or less. If the client’s customer is unable to pay an undisputed receivable solely as the result of credit risk, BancShares is then required to purchase the receivable from the client, less any borrowings for such client based on such defaulted receivable. The outstanding amount in the table above, less $191 million at September 30, 2022 of borrowings for such clients, is the maximum amount that BancShares would be required to pay under all DPAs. This maximum amount would only occur if all receivables subject to DPAs default in the manner described above, thereby requiring BancShares to purchase all such receivables from the DPA clients.

The table above includes $2.0 billion of DPA exposures at September 30, 2022, related to receivables on which BancShares has assumed the credit risk. The table also includes $123 million available under DPA credit line agreements provided at September 30, 2022. The DPA credit line agreements specify a contractually committed amount of DPA credit protection and are cancellable by us only after a notice period, which is typically 90 days or less.

Litigation and other Contingencies

The Parent Company and certain of its subsidiaries have been named as a defendant in legal actions arising from its normal business activities in which damages in various amounts are claimed. BancShares is also exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed.

As part of the CIT Merger, BancShares assumed litigation in which CIT and CIT Bank, N.A. d/b/a OneWest Bank (“OneWest”) were named as defendants in a then existing lawsuit brought as a qui tam (i.e., whistleblower) action by a former OneWest employee on behalf of the U.S. Government. The lawsuit asserted claims related to OneWest’s participation in the Home Affordable Modification Program (“HAMP”) administered by the United States Treasury Department, as well as Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) programs. On October 15, 2019, the plaintiff filed a second amended complaint in the United States District Court for the Eastern District of Texas alleging that, beginning in 2009, CIT (and its predecessor, OneWest) falsely certified its compliance with HAMP, submitted false claims for incentive payments for loan modifications, submitted false claims for FHA and VA insurance payments, and failed to self-report these violations. Plaintiff sought the return of all U.S. Government payments to CIT under the HAMP, FHA, and VA programs. CIT has received approximately $93 million in servicer incentives under HAMP, and the U.S. Government has paid more than $440 million in the aggregate in borrower, servicer, and investor incentives in connection with loans modified by OneWest or CIT under HAMP. OneWest and CIT denied all allegations of liability. The Department of Justice declined to intervene in the case.

The parties have settled all claims for $18.5 million. On July 26, 2022, pursuant to the terms of the settlement, the parties filed a joint stipulation of dismissal with prejudice. The settlement payment of $18.5 million was paid on August 4, 2022. On August 29, 2022, the Court entered an Order dismissing the case.

BancShares is also involved, and from time to time in the future may be involved, in a number of pending and threatened judicial, regulatory, and arbitration proceedings as well as proceedings, investigations, examinations and other actions brought or considered by governmental and self-regulatory agencies. These matters arise in connection with the ordinary conduct of BancShares’ business. At any given time, BancShares may also be in the process of responding to subpoenas, requests for documents, data and testimony relating to such matters and engaging in discussions to resolve the matters (all of the foregoing collectively being referred to as “Litigation”). While most Litigation relates to individual claims, BancShares may be subject to putative class action claims and similar broader claims and indemnification obligations.

In light of the inherent difficulty of predicting the outcome of Litigation matters and indemnification obligations, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, BancShares cannot state with confidence what the eventual outcome of the pending Litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines, or penalties related to each pending matter will be, if any. In accordance with applicable accounting guidance, BancShares’ establishes reserves for Litigation when those matters present loss contingencies as to which it is both probable that a loss will occur and the amount of such loss can reasonably be estimated. Based on currently available information, BancShares believes that the outcome of Litigation that is currently pending will not have a material adverse effect on BancShares’ financial condition, but may be material to BancShares’ operating results or cash flows for any particular period, depending in part on its operating results for that period. The actual results of resolving such matters may be substantially higher than the amounts reserved.

For certain Litigation matters in which BancShares is involved, BancShares is able to estimate a range of reasonably possible losses in excess of established reserves and insurance. For other matters for which a loss is probable or reasonably possible, such an estimate cannot be determined. For Litigation and other matters where losses are reasonably possible, management currently estimates an aggregate range of reasonably possible losses of up to $10 million in excess of any established reserves and any insurance we reasonably believe we will collect related to those matters. This estimate represents reasonably possible losses (in excess of established reserves and insurance) over the life of such Litigation, which may span a currently indeterminable number of years, and is based on information currently available as of September 30, 2022. The Litigation matters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate.

Those Litigation matters for which an estimate is not reasonably possible or as to which a loss does not appear to be reasonably possible, based on current information, are not included within this estimated range and, therefore, this estimated range does not represent BancShares’ maximum loss exposure.

The foregoing statements about BancShares’ Litigation are based on BancShares’ judgments, assumptions, and estimates and are necessarily subjective and uncertain. In the event of unexpected future developments, it is possible that the ultimate resolution of these cases, matters, and proceedings, if unfavorable, may be material to BancShares’ consolidated financial position in a particular period.

NOTE 24 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CIT Northbridge Credit LLC (“Northbridge”) is an asset-based-lending joint venture between FCB (as successor to CIT Bank) and Allstate Insurance Company and its subsidiary (“Allstate”) that extends credit in asset-based lending middle-market loans. FCB holds a 20% equity investment in Northbridge, and CIT Asset Management LLC, a non-bank subsidiary of FCB, acts as an investment advisor and servicer of the loan portfolio. Allstate is an 80% equity investor. FCB’s investment was $36 million at September 30, 2022, with the expectation of additional investment as the joint venture grows. Management fees were earned on loans under management. The joint venture is not consolidated, and the investment is being accounted for using the equity method.

BancShares has investments in qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. These investments are accounted for using the proportional amortization method. BancShares also has investments in various trusts, partnerships, and limited liability corporations established in conjunction with structured financing transactions of equipment, power and infrastructure projects and workout transactions. BancShares’ interests in these entities were entered into in the ordinary course of business that are accounted for under the equity or cost methods. Other assets included $722 million at September 30, 2022 and $169 million at December 31, 2021, of tax credit investments and investments in unconsolidated entities relating to such transactions.

The combination of investments in and loans to unconsolidated entities represents BancShares’ maximum exposure to loss, as BancShares does not provide guarantees or other forms of indemnification to unconsolidated entities.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis (“MD&A”) of earnings and related financial data is presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. (the “Parent Company” and, when including all of its subsidiaries on a consolidated basis, “we,” “us,” “our,” or “BancShares”) and its banking subsidiary, First-Citizens Bank & Trust Company (“FCB”). Unless otherwise noted, the terms “we,” “us,” “our,” and “BancShares” in this section refer to the consolidated financial position and consolidated results of operations for BancShares.

This MD&A is expected to provide our investors with a view of BancShares’ financial condition and results of operations from our management’s perspective. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q along with our financial statements and related MD&A of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2022, the reclassifications had no effect on stockholders’ equity or net income as previously reported.

Throughout this MD&A we reference specific "Notes" to our financial statements. These are Notes to the consolidated financial statements in Part I, Item 1. Financial Statements.

Management uses certain non-GAAP financial measures in its analysis of the financial condition and results of operations of BancShares. See "Non-GAAP Financial Measurements" for a reconciliation of these financial measures to the most directly comparable financial measures in accordance with GAAP.

On January 3, 2022, BancShares completed its largest acquisition to date with the merger with CIT Group Inc. (“CIT”) and its subsidiary CIT Bank, N.A., a national banking association (“CIT Bank”), pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Merger (as amended, the “Merger Agreement”) (such acquisition, the “CIT Merger”). CIT had consolidated total assets of approximately $53.2 billion as of December 31, 2021. The CIT Merger is described further below and in Note 2 — Business Combinations. Financial data for periods prior to the CIT Merger does not include any CIT related data, and therefore is not directly comparable to the three and nine months ended September 30, 2022.

EXECUTIVE OVERVIEW

The Parent Company is a bank holding company ("BHC") and Financial Holding Company (“FHC”). BancShares is regulated by the Board of Governors of the Federal Reserve System under the U.S. Bank Holding Company Act of 1956, as amended. BancShares is also registered under the BHC laws of North Carolina and is subject to supervision, regulation and examination by the North Carolina Commissioner of Banks (“NCCOB”). BancShares conducts its banking operations through its wholly-owned subsidiary FCB, a state-chartered bank organized under the laws of the state of North Carolina. FCB is regulated by the NCCOB. In addition, FCB, as an insured depository institution, is supervised by the Federal Deposit Insurance Corporation (“FDIC”).

BancShares’ earnings and cash flows are primarily derived from its commercial and retail banking activities. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of BancShares. We expanded our products and services with the CIT Merger, and now have leased assets, primarily rail-related, and offer factoring services. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and interest-earning deposits at banks. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by banks. The fees and service charges generated from these products and services are primary sources of noninterest income, which is an essential component of our total revenue.

We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people.

Refer to our 2021 Form 10-K for further discussion of our strategy.

Significant Events in 2022

CIT Merger

As discussed in detail in Note 2 — Business Combinations, the CIT Merger closed on January 3, 2022.

Significant items related to the CIT Merger are as follows:

•The fair value of total assets acquired was $53.8 billion, which mainly consisted of approximately $32.7 billion of loans, $7.8 billion of operating lease equipment and approximately $6.6 billion of investment securities. Loans consisted of commercial and industrial loans, commercial real estate loans and finance leases, which are included in our Commercial Banking segment, and consumer loans (primarily residential mortgages), which are in our General Banking segment, as further discussed below. Acquired rail assets were mostly operating lease equipment and reported in the new Rail segment.

•The fair value of deposits acquired was $39.4 billion that included deposits derived from online banking and Home Owner’s Association (“HOA”) deposits related to Community Association Banking (“CAB”), and commercial deposits. The transaction also included approximately 80 bank branches, about 60 of which were in Southern California and the remaining primarily in the Southwest, Midwest and Southeast.

•FCB assumed certain issued and outstanding series of CIT debt securities with a fair value of $4.5 billion in connection with the CIT Merger. On February 24, 2022, BancShares redeemed approximately $2.9 billion of senior unsecured notes that were assumed in the CIT Merger as part of a liability management transaction.

•FCB recorded a preliminary gain on acquisition of $431 million, representing the excess of the net assets acquired over the purchase price, and recorded a $143 million core deposit intangible and a $52 million intangible liability for net below market lessor lease contract rental rates related to the rail portfolio.

Share Repurchase Program

On July 26, 2022, our Board of Directors (the “Board”) authorized a share repurchase program for up to 1,500,000 shares of BancShares’ Class A Common Stock for the period commencing August 1, 2022 through July 28, 2023. Under the authorized share repurchase program, shares of Class A Common Stock were authorized to be repurchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan. During the three months ended September 30, 2022, we purchased 1,027,414 shares of Class A Common Stock, and subsequent to September 30, 2022, we purchased an additional 472,586 shares of Class A Common Stock, thereby completing the share repurchase program. See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Quarterly Report on Form 10-Q for further details on these purchases.

Segment Updates

Information about our segments is included in Note 22 — Business Segment Information and in the section entitled “Results by Business Segments” later in this MD&A.

Financial Performance Summary

The following table summarizes the BancShares’ results in accordance with U.S. GAAP, unless otherwise noted. Refer to the section entitled “Non-GAAP Financial Measurements” at the end of this MD&A for a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Additionally, due to the CIT Merger, current quarter and year-to-date activity and ending and average balances are not comparable to the 2021 periods. Beginning with the second quarter of 2022, we presented a linked quarter comparison in the discussions of our consolidated results of operations and consolidated financial position, as permitted by applicable rules of the Securities and Exchange Commission. We believe this provides relevant information to our investors relating to our performance due to the inclusion of the CIT Merger in both quarters. Further discussions are included in the remaining sections of this MD&A.

Table 1

Selected Quarterly Data


dollars in millions, except share data	Three Months Ended									Nine Months Ended
	September 30, 2022			June 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
SUMMARY OF OPERATIONS
Interest income	$	906		$	757		$	363		$	2,373		$	1,080
Interest expense	111			57			16			229			47
Net interest income	795			700			347			2,144			1,033
Provision (benefit) for credit losses	60			42			(1)			566			(32)
Net interest income after provision for credit losses	735			658			348			1,578			1,065
Noninterest income	433			424			124			1,707			394
Noninterest expense	760			745			314			2,315			911
Income before income taxes	408			337			158			970			548
Income taxes	93			82			34			129			124
Net income	315			255			124			841			424
Preferred stock dividends	12			17			5			36			14
Net income available to common stockholders	$	303		$	238		$	119		$	805		$	410



PER COMMON SHARE DATA
Average diluted common shares	15,727,993			16,035,090			9,816,405			15,867,314			9,816,405
Net income available to common stockholders (diluted)	$	19.25		$	14.86		$	12.17		$	50.70		$	41.79

Book value per common share	$	597.75		$	609.95		$	432.07		$	597.75		$	432.07


KEY PERFORMANCE METRICS
Return on average assets (ROA)	1.16		%	0.95		%	0.88		%	1.03		%	1.05		%

Return on average common stockholders' equity (ROE)	12.49		%	9.87		%	11.29		%	11.18		%	13.50		%





Net interest margin (NIM)(1)	3.40		%	3.04		%	2.61		%	3.06		%	2.69		%

SELECTED QUARTERLY AVERAGE BALANCES
Total investments	$	19,119		$	19,185		$	10,708		$	19,264		$	10,337
Total loans and leases(2)	68,824			66,488			32,708			66,885			32,985
Total operating lease equipment (net)	7,981			7,973			—			7,960			—
Total assets	107,987			107,575			55,922			108,643			53,927
Total deposits	88,422			90,621			49,107			90,209			47,254
Total common stockholders' equity	9,618			9,686			4,197			9,622			4,063


SELECTED QUARTER-END BALANCES
Total investments	$	18,841		$	19,136		$	10,875		$	18,841		$	10,875
Total loans and leases	69,790			67,735			32,516			69,790			32,516
Total operating lease equipment (net)	7,984			7,971			—			7,984			—
Total assets	109,310			107,673			56,902			109,310			56,902
Total deposits	87,553			89,329			50,065			87,553			50,065
Total common stockholders' equity	8,952			9,761			4,242			8,952			4,242

Loan to deposit ratio	79.71		%	75.83		%	64.95		%	79.71		%	64.95		%
Noninterest-bearing deposits to total deposits	30.37		%	29.75		%	42.97		%	30.37		%	42.97		%

CAPITAL RATIOS
Common equity tier 1 ratio	10.37		%	11.35		%	11.34		%	10.37		%	11.34		%
Tier 1 risk-based capital ratio	11.36		%	12.37		%	12.32		%	11.36		%	12.32		%
Total risk-based capital ratio	13.46		%	14.46		%	14.30		%	13.46		%	14.30		%
Tier 1 leverage capital ratio	9.31		%	9.85		%	7.68		%	9.31		%	7.68		%


ASSET QUALITY
Ratio of nonaccrual loans to total loans	0.65		%	0.76		%	0.50		%	0.65		%	0.50		%
Allowance for credit losses to loans ratio	1.26		%	1.26		%	0.56		%	1.26		%	0.56		%
Net charge off ratio	0.10		%	0.13		%	0.06		%	0.11		%	0.04		%

(1) The rate presented is calculated net of average credit balances of factoring clients.

(2) Average loan balances include held for sale and non-accrual loans.

Third Quarter Income Statement Highlights

For the three months ended September 30, 2022 compared to the three months ended June 30, 2022 (“linked quarter” comparisons):

•Net income for the three months ended September 30, 2022 was $315 million, an increase of $60 million, or 23% compared to the linked quarter. The increase was primarily due to higher net interest income, partially offset by higher provision for credit losses and operating expenses. Net income available to common stockholders for the three months ended September 30, 2022 totaled $303 million, an increase of $65 million, or 27% compared to the linked quarter. Net income per diluted common share for the three months ended September 30, 2022 was $19.25, an increase of 30% over the linked quarter.

•Return on average assets for the three months ended September 30, 2022 was 1.16%, compared to 0.95% for the three months ended June 30, 2022.

•Net interest income (“NII”) for the three months ended September 30, 2022 was $795 million, an increase of $95 million, or 13% compared to the three months ended June 30, 2022. This was primarily due to loan growth, higher yields on loans and overnight investments, and higher purchase accounting accretion, partially offset by higher costs on interest-bearing deposits and borrowings. The net interest margin (“NIM”) for the three months ended September 30, 2022 was 3.40%, an increase of 36 bps from 3.04% for the three months ended June 30, 2022, reflecting the rising interest rate environment that increased yields on our earning assets, partially offset by a higher rate paid on interest-bearing deposits and borrowings.

•Provision for credit losses for the three months ended September 30, 2022 was $60 million compared to a provision of $42 million for the three months ended June 30, 2022. The increase reflects moderate deterioration in the macroeconomic forecast used in the CECL forecasting process and loan portfolio growth, partially offset by benefits from improved credit quality and portfolio mix. The net charge-off ratio for the three months ended September 30, 2022 was 0.10%, down from 0.13% for the three months ended June 30, 2022.

•Noninterest income for the three months ended September 30, 2022 was $433 million, compared to $424 million for the three months ended June 30, 2022. The increase included higher rental income on operating lease equipment, higher capital markets fees revenue, and various other miscellaneous income items, partially offset by lower service charges on deposit accounts.

•Noninterest expense for the three months ended September 30, 2022 was $760 million, compared to $745 million in the three months ended June 30, 2022. The increase of $15 million primarily reflects higher personnel costs and higher marketing expenses due to digital marketing efforts, partially offset by lower FDIC insurance expense and professional fees.

•Select items in the current and linked quarters include:

•For the three months ended September 30, 2022:

•A settlement gain related to returned equipment in other non-interest income of $5 million.

•Impairment charge in noninterest expense of $5 million related to the closure of an office facility.

•CIT Merger-related expenses of $33 million in noninterest expense.

•For the three months ended June 30, 2022:

•Gain on sale of corporate aircraft acquired in the CIT Merger of $6 million in other noninterest income.

•CIT Merger-related expenses of $34 million in noninterest expense.

For the three months ended September 30, 2022 compared to the three months ended September 30, 2021:

•Net income for the three months ended September 30, 2022 was $315 million, an increase of $191 million, or 154% compared to the three months ended September 30, 2021. Net income available to common stockholders for the three months ended September 30, 2022 totaled $303 million, an increase of $184 million, or 154% compared to the three months ended September 30, 2021. Net income per diluted common share for the three months ended September 30, 2022 was $19.25, an increase of 58% over the three months ended September 30, 2021.

•Select items for the three months ended September 30, 2022 are mentioned above.

•Return on average assets for the three months ended September 30, 2022 was 1.16%, compared to 0.88% in the same quarter in 2021.

•NII was $795 million for the three months ended September 30, 2022, an increase of $448 million, or 129% compared to the three months ended September 30, 2021. This was primarily due to the CIT Merger, as well as subsequent loan growth and rising interest rates, partially offset by a decline in interest income on SBA-PPP loans. NIM was 3.40% for the three months ended September 30, 2022, an increase of 79 bps from 2.61% for the three months ended September 30, 2021, reflecting higher interest rate environment and the assets acquired and liabilities assumed in the CIT Merger.

•Provision for credit losses for the three months ended September 30, 2022 was $60 million, compared to a benefit of $1 million for the three months ended September 30, 2021, primarily due to the CIT Merger, as well as moderate deterioration in the macroeconomic forecast used in the CECL forecasting process and loan growth, compared to a reserve release in the third quarter of 2021. The net charge-off ratio for the three months ended September 30, 2022 was 0.10%, up from 0.06% for the three months ended September 30, 2021.

•Noninterest income for the three months ended September 30, 2022 was $433 million, compared to $124 million for the three months ended September 30, 2021. The largest component of the increase was rental income on operating leases totaling $219 million. The remaining increase was driven primarily by the added activity due to the CIT Merger.

•Noninterest expense for the three months ended September 30, 2022 was $760 million, compared to $314 million for the three months ended September 30, 2021. The increase is associated with higher expenses for the combined company, led by higher salaries and benefit costs of $157 million due to the increase in employees and certain new costs, such as $139 million of depreciation and maintenance costs associated with the operating lease portfolio.

Year to Date Income Statement Highlights

•Net income for the nine months ended September 30, 2022 was $841 million, an increase of $417 million, or 98% compared to the same period in 2021. Net income available to common stockholders for the nine months ended September 30, 2022 totaled $805 million, an increase of $395 million, or 96% compared to the same period in 2021. Net income per diluted common share for the nine months ended September 30, 2022 was $50.70, an increase 21% over the same period in 2021. The increases are primarily attributed to the CIT Merger.

•Return on average assets for the nine months ended September 30, 2022 was 1.03%, compared to 1.05% in the same period in 2021.

•NII for the nine months ended September 30, 2022 was $2,144 million, an increase of $1,111 million, or 108% compared to the same period in 2021. This was primarily due to the CIT Merger, as well as loan growth and a higher interest rate environment, partially offset by a decline in interest income on SBA-PPP loans. NIM for the nine months ended September 30, 2022 was 3.06%, an increase of 37 bps from 2.69% for the same period in 2021.

•Provision for credit losses for the nine months ended September 30, 2022 was $566 million, compared to a benefit of $32 million for the same period in 2021. The provision in 2022 included the day 2 CECL provision of $513 million, and reflects the CIT Merger, as well as moderate deterioration in the macroeconomic forecast used in the CECL forecasting process and loan growth. The net charge-off ratio for the nine months ended September 30, 2022 was 0.11%, up from 0.04% for the same period in 2021.

•Noninterest income for the nine months ended September 30, 2022 was $1,707 million, compared to $394 million for the same period in 2021. The nine months ended September 30, 2022 includes a preliminary gain on acquisition of $431 million and rental income on operating leases of $640 million. The remaining increase was primarily driven by the added activity due to the CIT Merger.

•Noninterest expense for the nine months ended September 30, 2022 was $2,315 million, compared to $911 million for the same period in 2021. The increase is primarily associated with the CIT Merger, including higher salaries and benefit costs of $478 million due to the increase in employees, $399 million of depreciation and maintenance costs associated with the operating lease portfolio and higher merger-related costs of $182 million.

•Select items for the nine months ended September 30, 2022 are as follows:

•Current expected credit losses (“CECL”) day 2 provision for loans and leases and unfunded commitments of $513 million.

•Preliminary gain on acquisition of $431 million in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price.

•Gain on sale of corporate aircraft acquired in the CIT Merger of $6 million in other noninterest income.

•Gain on debt redemptions in noninterest income of $6 million from $2.9 billion of borrowings assumed in the CIT Merger.

•Merger-related expenses of $202 million in noninterest expenses.

•A reduction in other noninterest expense of $27 million related to the termination of certain legacy CIT retiree benefits, reflecting amounts previously accrued.

Balance Sheet Highlights

•Total loans and leases at September 30, 2022 were $69.8 billion, an increase of $2.1 billion or 12.0% annualized, from June 30, 2022. We continued to see growth in our branch network, as well as growth in our commercial bank from a number of our industry verticals, such as healthcare and technology, and small business lending, and growth in both commercial mortgage loans and consumer mortgage loans. Total loans and leases increased $37.4 billion from December 31, 2021, primarily reflecting the addition of $32.7 billion from the CIT Merger.

•Total deposits at September 30, 2022 were $87.6 billion, a decrease of $1.8 billion or 7.9% annualized, from June 30, 2022. Total deposits declined during the second quarter and continued lower in the third quarter, reflecting the most rate sensitive customers moving funds in response to increases in the target federal funds rate. The decline in total deposits as compared to June 30, 2022 was primarily concentrated in acquired branches and commercial banking, partially offset by growth in our Direct Bank. Total deposits increased $36.1 billion from December 31, 2021, reflecting the addition of $39.4 billion from the CIT Merger, partially offset by the noted declines.

•At September 30, 2022, BancShares remained well capitalized with a total risk-based capital ratio of 13.46%, a Tier 1 risk-based capital of 11.36%, a common equity Tier 1 ratio of 10.37% and a leverage ratio of 9.31%.

Recent Economic and Industry Developments

Throughout 2022, the Federal Reserve’s Federal Open Market Committee (“FOMC”) has significantly raised its target for the federal funds rate in an effort to combat rising inflation. The FOMC raised interest rates at its March, May, June, July and September meetings by 25, 50, 75, 75 and 75 basis points, respectively. With the latest increase at the September meeting, the FOMC raised their benchmark federal funds rate to a range between 3.00% - 3.25%. Possible further increases could be made at their remaining meetings in November and December 2022. The FOMC’s efforts to control inflation has increased concerns over the possibility of a recession within the next twelve months. In addition, geopolitical events, including the ongoing conflict between Russia and Ukraine and related events, are likely to create additional upward pressure on inflation and weigh on economic activity. The timing and impact of inflation, continued volatility in the stock market, rising interest rates and possible recession will depend on future developments, which are highly uncertain and difficult to predict.

RESULTS OF OPERATIONS

NET INTEREST INCOME AND NET INTEREST MARGIN

NII is the difference between interest income earned on assets such as loans, leases, securities and cash, and interest expense incurred on liabilities such as deposits and borrowings and is included as a line item on the Consolidated Statements of Income. NII for the three months ended September 30, 2022 was $795 million, up from $700 million in the three months ended June 30, 2022, and up from $347 million for the three months ended September 30, 2021. NII for the nine months ended September 30, 2022 was $2.14 billion, an increase of $1.11 billion, or 108% from $1.03 billion in the same period in 2021.

NII is affected by changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The following table presents the average balance sheet and related rates, along with disaggregated quarter-over-quarter changes in NII between volume (level of lending, investing or borrowing) and rate (rates charged to customers, received on investments or incurred on borrowings). Volume change is calculated as change in volume times the previous rate, while rate change is calculated as change in rate times the previous volume. The rate/volume change, change in rate times change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of their total. Tax equivalent net interest income was not materially different from NII, therefore we present NII in our analysis.

Table 2

Average Balances and Rates


dollars in millions	Three Months Ended
	September 30, 2022						June 30, 2022						Change in NII Due to:
	Average Balance		Income / Expense		Yield / Rate		Average Balance		Income / Expense		Yield / Rate		Volume(1)		Yield /Rate(1)		Total Change
Loans and leases (1)(2)	$	67,733	$	785	4.58	%	$	65,298	$	655	4.01	%	$	28	$	102	$	130
Total investment securities	19,119		90		1.88		19,185		89		1.85		—		1		1

Interest-earning deposits at banks	5,685		31		2.17		7,629		13		0.72		(4)		22		18
Total interest-earning assets (2)	$	92,537	$	906	3.87	%	$	92,112	$	757	3.28	%	$	24	$	125	$	149

Operating lease equipment, net	$	7,981					$	7,973
Cash and due from banks	489						524
Allowance for credit losses	(851)						(849)
All other noninterest-earning assets	7,831						7,815
Total assets	$	107,987					$	107,575

Interest-bearing deposits:
Checking with interest	$	16,160	$	7	0.17	%	$	16,503	$	4	0.12	%	$	1	$	2	$	3
Money market	22,993		32		0.55		25,468		18		0.28		(2)		16		14
Savings	13,956		28		0.78		13,303		11		0.34		1		16		17
Time deposits	8,436		11		0.54		8,796		9		0.38		(1)		3		2
Total interest-bearing deposits	61,545		78		0.50		64,070		42		0.26		(1)		37		36
Borrowings:
Securities sold under customer repurchase agreements	617		1		0.16		627		—		0.16		1		—		1
Short-term FHLB borrowings	1,188		8		2.57		—		—		—		8		—		8
Short-term borrowings	1,805		9		1.74		627		—		0.16		9		—		9
Federal Home Loan Bank borrowings	1,784		11		2.45		386		2		1.64		8		1		9
Senior unsecured borrowings	898		5		2.00		894		4		2.05		1		—		1
Subordinated debt	1,054		8		3.21		1,057		8		3.06		—		—		—
Other borrowings	67		—		4.51		83		1		2.46		(1)		—		(1)
Long-term borrowings	3,803		24		2.59		2,420		15		2.43		8		1		9
Total borrowings	5,608		33		2.32		3,047		15		1.96		17		1		18
Total interest-bearing liabilities	$	67,153	$	111	0.65	%	$	67,117	$	57	0.34	%	$	16	$	38	$	54

Noninterest-bearing deposits	$	26,877					$	26,551
Credit balances of factoring clients	1,089						1,189
Other noninterest-bearing liabilities	2,369						2,151
Stockholders' equity	10,499						10,567
Total liabilities and stockholders' equity	$	107,987					$	107,575

Interest rate spread (2)					3.22	%					2.94	%
Net interest income and net yield on interest-earning assets (2)			$	795	3.40	%			$	700	3.04	%

(1) Loans and leases include non-PCD and PCD loans, nonaccrual loans and held for sale. Interest income on loans and leases includes accretion income and loan fees.

(2) The balance and rate presented is calculated net of average credit balances of factoring clients.


dollars in millions	Three Months Ended
	September 30, 2022						September 30, 2021						Change in NII Due to:
	Average Balance		Income / Expense		Yield / Rate		Average Balance		Income / Expense		Yield / Rate		Volume(1)			Yield /Rate(1)			Total Change
Loans and leases (1)(2)	$	67,733	$	785	4.58	%	$	32,708	$	320	3.85	%	$	456		$	9		$	465
Total investment securities	19,119		90		1.88		10,708		40		1.47		33			17			50

Interest-earning deposits at banks	5,685		31		2.17		8,956		3		0.15		16			12			28
Total interest-earning assets (2)	$	92,537	$	906	3.87	%	$	52,372	$	363	2.73	%	$	505	505	$	38		$	543

Operating lease equipment, net	$	7,981					$	—
Cash and due from banks	489						365
Allowance for credit losses	(851)						(190)
All other noninterest-earning assets	7,831						3,377
Total assets	$	107,987					$	55,924

Interest-bearing deposits:
Checking with interest	$	16,160	$	7	0.17	%	$	11,324	$	1	0.05	%	$	4		$	2		$	6
Money market	22,993		32		0.55		9,866		2		0.09		23			7			30
Savings	13,956		28		0.78		3,979		1		0.03		18			9			27
Time deposits	8,436		11		0.54		2,599		4		0.61		9			(2)			7
Total interest-bearing deposits	61,545		78		0.50		27,768		8		0.12		54			16		16	70
Borrowings:
Securities sold under customer repurchase agreements	617		1		0.16		672		—		0.21		1			—			1
Short-term FHLB borrowings	1,188		8		2.57		—		—		—		8			—			8
Short-term borrowings	1,805		9		1.74		672		—		0.21		9			—			9
Federal Home Loan Bank borrowings	1,784		11		2.45		646		4		1.28		4			3			7
Senior unsecured borrowings	898		5		2.00		—		—		—		5			—			5
Subordinated debt	1,054		8		3.21		497		3		3.35		5			—			5
Other borrowings	67		—		4.51		79		1		1.24		(2)			1			(1)
Long-term borrowings	3,803		24		2.59		1,222		8		2.12		12			4			16
Total borrowings	5,608		33		2.32		1,894		8		1.44		21			4			25
Total interest-bearing liabilities	$	67,153	$	111	0.65	%	$	29,662	$	16	0.20	%	$	75		$	20		$	95

Noninterest-bearing deposits	$	26,877					$	21,339
Credit balances of factoring clients	1,089						—
Other noninterest-bearing liabilities	2,369						362
Stockholders' equity	10,499						4,561
Total liabilities and stockholders' equity	$	107,987					$	55,924

Interest rate spread (2)					3.22	%					2.53	%
Net interest income and net yield on interest-earning assets (2)			$	795	3.40	%			$	347	2.61	%

(1), (2) See footnotes to previous table.


dollars in millions	Nine Months Ended
	September 30, 2022						September 30, 2021						Change in NII Due to:
	Average Balance		Income / Expense		Yield / Rate		Average Balance		Income / Expense		Yield / Rate		Volume(1)		Yield /Rate(1)		Total Change
Loans and leases (1)(2)	$	65,739	$	2,061	4.17	%	$	32,985	$	967	3.89	%	$	1,022	$	72	$	1,094
Total investment securities	19,264		262		1.81	%	10,337		106		1.36	%	112		44		156

Interest-earning deposits at banks	8,242		50		0.81	%	7,560		7		0.12	%	1		42		43
Total interest-earning assets (2)	$	93,245	$	2,373	3.39	%	$	50,882	$	1,080	2.81	%	$	1,135	$	158	$	1,293

Operating lease equipment, net	$	7,960					$	—
Cash and due from banks	517						354
Allowance for credit losses	(871)						(208)
All other noninterest-earning assets	7,792						2,899
Total assets	$	108,643					$	53,927

Interest-bearing deposits:
Checking with interest	$	16,437	$	16	0.14	%	$	11,010	$	4	0.05	%	$	3	$	9	$	12
Money market	24,875		65		0.35	%	9,489		7		0.11	%	24		34		58
Savings	13,640		48		0.47	%	3,748		1		0.03	%	8		39		47
Time deposits	9,004		30		0.45	%	2,692		13		0.63	%	22		(5)		17
Total interest-bearing deposits	63,956		159		0.33	%	26,939		25		0.13	%	57		77		134
Borrowings:
Securities sold under customer repurchase agreements	615		1		0.16	%	664		1		0.21	%	—		—		—
Short-term FHLB borrowings	400		8		2.57	%	—		—		—	%	8		—		8
Short-term borrowings	1,015		9		1.11	%	664		1		0.21	%	8		—		8
Federal Home Loan Bank borrowings	941		15		2.07	%	649		7		1.28	%	3		5		8
Senior unsecured borrowings	1,497		21		1.83	%	—		—		—	%	21		—		21
Subordinated debt	1,057		24		3.07	%	497		10		3.36	%	15		(1)		14
Other borrowings	79		1		2.86	%	83		4		1.22	%	(4)		1		(3)
Long-term borrowings	3,574		61		2.29	%	1,229		21		2.12	%	35		5		40
Total borrowings	4,589		70		2.03	%	1,893		22		1.45	%	43		5		48
Total interest-bearing liabilities	$	68,545	$	229	0.45	%	$	28,832	$	47	0.21	%	$	100	$	82	$	182

Noninterest-bearing deposits	$	26,253					$	20,316
Credit balances of factoring clients	1,146						—
Other noninterest-bearing liabilities	2,202						352
Stockholders' equity	10,497						4,427
Total liabilities and stockholders' equity	$	108,643					$	53,927

Interest rate spread (2)					2.94	%					2.60	%
Net interest income and net yield on interest-earning assets (2)			$	2,144	3.06	%			$	1,033	2.69	%

(1), (2) See footnotes to previous table.

Third Quarter 2022 compared to Second Quarter 2022

•NII for the three months ended September 30, 2022 was $795 million, an increase of $95 million compared to the second quarter of 2022. This was primarily due to higher yields on loans and overnight investments, loan growth and higher purchase accounting accretion, partially offset by higher costs on interest-bearing deposit and borrowings.

◦Interest income earned on loans and leases for the three months ended September 30, 2022 was $785 million, an increase of $130 million compared to the second quarter of 2022. The increase was primarily due to higher yields and growth in the average loans and leases balance from $65.3 billion in the previous quarter to $67.7 billion in the current quarter. In addition, the third quarter benefited from higher purchase accounting accretion, an increase of $15 million, partially offset by lower SBA PPP income, down $3 million.

◦Interest income earned on investment securities for the three months ended September 30, 2022 was $90 million, an increase of $1 million compared to the second quarter of 2022. The slight increase was primarily due to higher reinvestment rates.

◦Interest income earned on interest earning deposits at banks for the three months ended September 30, 2022 was $31 million, an increase of $18 million, reflecting higher Fed Funds rates that offset the decline in the average balance.

◦Interest expense on interest-bearing deposits for the three months ended September 30, 2022 was $78 million, an increase of $36 million compared to the second quarter of 2022, as higher deposit rates were partially offset by lower balances, with the decline primarily concentrated in higher cost money market accounts. Interest expense on borrowings for the three months ended September 30, 2022 was $33 million, an increase of $18 million compared to the second quarter of 2022, driven by higher FHLB borrowings to fund our loan growth.

•NIM for the three months ended September 30, 2022 was 3.40%, an increase of 36 bps from the second quarter of 2022, due to the impact of the items noted above, including higher earning asset yields, strong loan growth and higher purchase accounting accretion, partially offset by higher interest-bearing deposit and borrowing costs and higher borrowings.

•Average interest-earning assets for the three months ended September 30, 2022 were $92.5 billion. This is an increase from $92.1 billion for the three months ended June 30, 2022, reflecting an increase in average loans and leases presented above of $2.4 billion, which offset a decline in lower yielding average interest-earning cash deposits of $1.9 billion.

•Average interest-bearing liabilities for the three months ended September 30, 2022 were $67.2 billion, essentially unchanged from the three months ended June 30, 2022, reflecting higher FHLB borrowings that offset lower deposits. The average rate on interest-bearing liabilities for the three months ended September 30, 2022 was 0.65%. This is an increase of 31 bps compared to the three months ended June 30, 2022, reflecting the higher interest rate environment and shift in funding mix as the declines in interest-bearing deposits were replaced by increased borrowings to fund loan growth. Total deposits had declined during the second quarter and continued lower in the third quarter, reflecting the most rate sensitive customers moving funds in response to increases in the federal funds rate. The decline in total deposits compared to June 30, 2022 was primarily concentrated in acquired branches and commercial banking, partially offset by growth in our Direct Bank.

Third Quarter 2022 compared to Third Quarter 2021

•NII for the three months ended September 30, 2022 was $795 million, an increase of $448 million compared to the third quarter of 2021, primarily due to the CIT Merger, as well as subsequent loan growth and rising interest rates, partially offset by a decline in interest income on SBA-PPP loans.

◦Interest income earned on loans and leases for the three months ended September 30, 2022 was $785 million, an increase of $465 million compared to the third quarter of 2021. The increase was primarily due to the addition of $32.7 billion of loans acquired in the CIT Merger, along with organic growth in loans, partially offset by lower SBA-PPP interest income. SBA-PPP loans contributed $2 million of interest income during the third quarter of 2022 compared to $20 million in the third quarter of 2021.

◦Interest income earned on investment securities for the three months ended September 30, 2022 was $90 million, an increase of $50 million compared to the third quarter of 2021. The increase was due to the addition of $6.6 billion of investment securities acquired in the CIT Merger partially offset by maturities, and a higher portfolio yield.

◦Interest income earned on interest-earning deposits at banks for the three months ended September 30, 2022 was $31 million, an increase of $28 million compared to the third quarter of 2021, reflecting higher interest rates, which offset the decline in balance.

◦Interest expense on interest-bearing deposits for the three months ended September 30, 2022 was $78 million, an increase of $70 million compared to third quarter of 2021. The increase was primarily due to the additional interest-bearing deposits acquired in the CIT Merger, which carried a higher average rate than legacy FCB interest-bearing deposits, and due to increases in rates paid on deposits. Interest expense on borrowings for the three months ended September 30, 2022 was $33 million, an increase of $25 million compared to the third quarter of 2021. The increase was primarily due to the assumed borrowings in the CIT Merger along with the noted increase in FHLB borrowings and higher rate environment.

•NIM was 3.40% for the three months ended September 30, 2022, an increase of 79 bps from the third quarter of 2021, primarily reflective of the higher interest rate environment and the assets acquired and liabilities assumed in the CIT Merger.

•Average interest-earning assets for the three months ended September 30, 2022 were $92.5 billion, an increase of $40.2 billion compared to the third quarter of 2021. This increase was primary due to the added interest-earning assets from the CIT Merger.

•Average interest-bearing liabilities for the three months ended September 30, 2022 were $67.2 billion, an increase of $37.5 billion compared to the third quarter of 2021. The increase was primarily due to the addition of deposits and borrowings from the CIT Merger. Rates on interest-bearing liabilities for the three months ended September 30, 2022 were 0.65%. This increase of 45 bps from the third quarter of 2021 was primarily due to the higher rates on the deposits and borrowings acquired in the CIT Merger.

Year to Date 2022 compared to 2021

•NII for the nine months ended September 30, 2022 was $2.14 billion, an increase of $1.11 billion compared to the same period in 2021, primarily due to the CIT Merger, as well as loan growth and a higher interest rate environment, partially offset by a decline in interest income on SBA-PPP loans.

◦Interest income earned on loans and leases for the nine months ended September 30, 2022 was $2.06 billion, an increase of $1.09 billion compared to the same period in 2021. The increase was primarily volume driven due to the addition of $32.7 billion of loans acquired in the CIT Merger, along with organic growth in loans, partially offset by lower SBA-PPP interest income. SBA-PPP loans contributed $16 million of interest income during the nine months ended September 30, 2022 compared to $78 million in the same period in 2021.

◦Interest income earned on investment securities for the nine months ended September 30, 2022 was $262 million, an increase of $156 million compared to the same period in 2021. The increase was primarily due to the addition of $6.6 billion of investment securities acquired in the CIT Merger and a higher portfolio yield.

◦Interest income earned on interest-earning deposits at banks for the nine months ended September 30, 2022 was $50 million, an increase of $43 million compared to the same period in 2021, reflecting higher interest rates.

◦Interest expense on interest-bearing deposits for the nine months ended September 30, 2022 was $159 million, an increase of $134 million compared to the same period in 2021. The increase was primarily due to the additional interest-bearing deposits acquired in the CIT Merger, which carried a higher average rate than legacy FCB deposits, and was also impacted by the rising interest rate environment. Interest expense on borrowings for the nine months ended September 30, 2022 was $70 million, an increase of $48 million compared to the same period in 2021. The increase was primarily due to the assumed borrowings in the CIT Merger. Utilizing excess cash, we redeemed approximately $2.9 billion of the $4.5 billion assumed debt during the first quarter.

•NIM for the nine months ended September 30, 2022 was 3.06%, an increase of 37 bps from the same period in 2021, reflective of the higher interest rate environment and the impacts from the CIT Merger.

•Average interest-earning assets for the nine months ended September 30, 2022 were $93.2 billion, compared to $50.9 billion in 2021. The change was primarily due to the interest-earning assets acquired in the CIT Merger.

•Average interest-bearing liabilities for nine months ended September 30, 2022 were $68.5 billion. This is an increase from $28.8 billion in the same period in 2021, primarily due to the addition of deposits and borrowings from the CIT Merger. Rates on interest-bearing liabilities for the nine months ended September 30, 2022 were 0.45%. This increase of 24 bps from the same period in 2021 was primarily due to the higher rates on the deposits and borrowings acquired in the CIT Merger.

The following table details the average interest earning assets by category.

Table 3

Average Interest-earning Asset Mix


	% of Total Interest-earning Assets
	Three Months Ended						Nine Months Ended
	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Loans and leases	73	%	71	%	62	%	70	%	65	%
Investment securities	21	%	21	%	21	%	21	%	20	%

Interest-earning deposits at banks	6	%	8	%	17	%	9	%	15	%
Total interest earning assets	100	%	100	%	100	%	100	%	100	%

The following table shows our average funding mix.

Table 4

Average Funding Mix


	% of Total Interest-bearing Liabilities
	Three Months Ended						Nine Months Ended
	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Total interest-bearing deposits	92	%	95	%	94	%	93	%	94	%
Short-term borrowings	3	%	1	%	2	%	2	%	2	%

Long-term borrowings	5	%	4	%	4	%	5	%	4	%
	100	%	100	%	100	%	100	%	100	%

PROVISION FOR CREDIT LOSSES

BancShares provides an amount for expected credit losses within the loan and lease portfolio and for unfunded commitments that is based on factors discussed in the Critical Accounting Estimates section of our 2021 Form 10-K. The provision is recorded to bring the ACL and reserve for unfunded commitments to a level deemed appropriate to cover losses expected in the portfolios.

The provision for credit losses for the three months ended September 30, 2022 was $60 million, compared to a provision of $42 million for the three months ended June 30, 2022 and a benefit of $1 million for the same quarter in 2021. The provision for credit losses for the nine months ended September 30, 2022 was $566 million, compared to a benefit of $32 million in the same period of 2021.

The increase in the provision for credit losses for the three months ended September 30, 2022 compared to the three months ended June 30, 2022 was primarily due to moderate deterioration in the macroeconomic forecast used in the CECL forecasting process. The provision for credit losses included $10 million related to the provision for unfunded commitments, which is up from $6 million for the three months ended June 30, 2022. The ACL is further discussed in Risk Management - Credit Risk below.

The increases in the provision for credit losses compared to the three and nine months ended September 30, 2021 were primarily related to the impact of the CIT Merger and the moderate deterioration in the macroeconomic forecast used in the CECL forecasting process, while the prior year benefited from reserve releases. The nine months ended September 30, 2022 provision for credit losses includes the initial ACL for Non-Purchased Credit Deteriorated (“Non-PCD”) loans and leases acquired in the CIT Merger, which was established through an increase of $454 million to the provision for credit losses (the “Initial Non-PCD Provision”). Also, the provision for credit losses included $59 million related to unfunded commitments on the Merger Date related to off balance sheet exposures acquired at the time of the CIT Merger.

NONINTEREST INCOME

Noninterest Income

Noninterest income is an essential component of our total revenue. The primary sources of noninterest income consist of rental income on operating leases, fee income and other service charges, wealth management services, fees and service charges generated from deposit accounts, cardholder and merchant services, factoring commissions and mortgage lending and servicing.

Table 5

Noninterest Income


dollars in millions	Three Months Ended						Nine Months Ended
	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Rental income on operating leases	$	219	$	213	$	—	$	640	$	—
Other noninterest income:
Fee income and other service charges	44		39		10		118		31
Wealth management services	35		37		32		107		96
Service charges on deposit accounts	21		28		26		77		69
Factoring commissions	24		27		—		78		—
Cardholder services, net	25		26		23		76		65
Merchant services, net	8		9		9		27		26
Insurance commissions	11		11		4		34		12
Realized gain on sale of investment securities available for sale, net	—		—		8		—		33
Fair value adjustment on marketable equity securities, net	(2)		(6)		3		(5)		31
Bank-owned life insurance	8		9		1		25		2
Gain on sale of leasing equipment, net	2		5		—		13		—
Gain on acquisition	—		—		—		431		—
Gain on extinguishment of debt	1		—		—		7		—
Other noninterest income	37		26		8		79		29
Total other noninterest income	214		211		124		1,067		394
Total noninterest income	$	433	$	424	$	124	$	1,707	$	394

Rental Income on Operating Leases

Rental income from equipment we lease for the three months ended September 30, 2022 was $219 million, an increase of $6 million compared to three months ended June 30, 2022. Rental income is generated primarily in the Rail segment and to a lesser extent, in the Commercial Banking segment. Revenue is generally dictated by the size of the portfolio, utilization of the railcars, re-pricing of equipment upon lease maturities and pricing on new equipment leases. Re-pricing refers to the rental rate in the renewed equipment contract compared to the prior contract. Refer to the Rail discussion in the section entitled “Results by Business Segment” of this MD&A for further details.

Other Noninterest Income

Other noninterest income for the three months ended September 30, 2022 was $214 million, compared to $211 million in the three months ended June 30, 2022 and $124 million for the same period in 2021. Other noninterest income for the nine months ended September 30, 2022 was $1.07 billion, compared to $394 million in the same period of 2021. The increases for the comparable 2021 periods were primarily due to the additional activity related to the CIT Merger, both complimentary to existing BancShares services and products, as well as new items such as factoring services and gain on sale of leasing equipment, along with the preliminary estimated gain of $431 million on acquisition related to the CIT Merger. See Note 2 — Business Combinations for details.

The linked quarter comparison to the three months ended June 30, 2022 reflects increases and decreases among various noninterest income accounts. The more significant variances follow:

•Fee income and other service charges, consisting of items such as capital market-related fees, fees for lines and letters of credit, and servicing fees, increased by $5 million, primarily reflecting higher capital market fees.

•Service charges on deposit accounts decreased by $7 million. While the volume of transactions was up, the decline reflected lower rates we are charging our customers, for items such as overdraft fees. As previously disclosed, in January we announced our intent to eliminate our nonsufficient funds (“NSF”) fees and lower our overdraft fees from $36 to $10 on consumer accounts beginning mid-year 2022.

•Other noninterest income primarily consisted of bank owned life insurance (“BOLI”) income, gain on sale of loans and OREO. Other noninterest income also includes derivative-related gains and losses and other various income items. Other noninterest income increased by $11 million, which included a $5 million settlement gain related to returned equipment, a $4 million recovery on a restructured transaction, a $2 million reserve release on prior loan sales, and a net $2 million derivative gain. The prior quarter included a $6 million gain on sale of a corporate aircraft acquired in the CIT Merger.

NONINTEREST EXPENSE

Table 6

Noninterest Expense


dollars in millions	Three Months Ended						Nine Months Ended
	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Depreciation on operating lease equipment	$	87	$	89	$	—	$	257	$	—
Maintenance and other operating lease expenses	52		47		—		142		—
Operating expenses:
Salaries and benefits	351		341		194		1,044		566
Net occupancy expense	47		48		29		144		87
Equipment expense	55		54		30		161		89
Professional fees	13		15		5		44		13
Third-party processing fees	27		26		16		77		44
FDIC insurance expense	5		9		3		26		10
Marketing	15		9		3		32		7
Merger-related expenses	33		34		7		202		20
Intangible asset amortization	5		6		3		17		9
Other noninterest expense	70		67		24		169		66
Total operating expenses	621		609		314		1,916		911
Total noninterest expense	$	760	$	745	$	314	$	2,315	$	911

Depreciation on Operating Lease Equipment

Depreciation expense is driven by rail equipment and small and large ticket equipment we own and lease to others. The decrease in expense from the prior quarter reflects higher adjustments to residual values that were recorded in the prior quarter. Operating lease activity is in the Rail and Commercial Banking segments. The useful lives of rail equipment is generally longer in duration, 40-50 years, whereas small and large ticket equipment is generally 3-10 years. Refer to the Rail discussion in the section entitled “Results by Business Segments” of this MD&A for further details.

Maintenance and Other Operating Lease Expenses

Rail provides railcars primarily pursuant to full-service lease contracts under which Rail as lessor is responsible for railcar maintenance and repair. Maintenance and other operating lease expenses for the three months ended September 30, 2022 and June 30, 2022 were $52 million and $47 million, respectively, and $142 million for nine months ended September 30, 2022. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable. The increase from the prior quarter reflects higher repair costs for railcars put back on lease and inflationary pressures. Refer to the Rail discussion in the section entitled “Results by Business Segments” of this MD&A for further details.

Operating Expenses

The primary components of operating expenses are salaries and related employee benefits, occupancy and equipment expense.

Operating expenses for the three months ended September 30, 2022 were $621 million, compared to $609 million in the three months ended June 30, 2022 and $314 million for the same period in 2021. Operating expenses for the nine months ended September 30, 2022 were $1.92 billion compared to $911 million in the same period of 2021. The increases compared to the same periods in 2021 were primarily driven by the CIT Merger, of which significant drivers included higher employee headcount, more branches and office space, additional technology systems and merger-related expenses. Other expense for nine months ended September 30, 2022 included a $27 million reversal of an accrual related to legacy CIT postretirement plans that were terminated after the Merger Date. See Note 21 — Employee Benefit Plans.

Operating expenses for the three months ended September 30, 2022 increased by $12 million compared to the linked quarter, primarily comprised of the following:

•Salaries and benefits increased by $10 million, primarily reflecting higher salary expense due to new hires, promotions and other salary adjustments, higher costs for temporary workers, and higher revenue-based incentive compensation, partially offset by lower employee benefit costs. The staff additions were the result of building out teams to support our move to large bank compliance, as well as to backfill vacancies.

•A $4 million decrease in FDIC insurance expense.

•Marketing costs increased by $6 million, reflecting the timing of our advertising relating to marketing efforts for the Direct Bank.

•Other expenses consisted of other insurance and taxes (other than income tax), foreclosure, collection and other OREO-related expenses, consulting, telecommunications and other miscellaneous expenses including travel, postage, supplies, and appraisal expense. Changes in these items were not material, while a select item included an impairment charge of $5 million related to the closure of an office facility, and the prior quarter included a legal settlement accrual.

INCOME TAXES

Table 7

Income Tax Data


dollars in millions	Three Months Ended									Nine Months Ended
	September 30, 2022			June 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Income before income taxes	$	408		$	337		$	158		$	970		$	548
Income tax expense	$	93		$	82		$	34		$	129		$	124
Effective tax rate	22.9		%	24.2		%	21.5		%	13.3		%	22.6		%

The effective tax rate (“ETR”) was 22.9% in the three months ended September 30, 2022, compared to 24.2% for the three months ended June 30, 2022 and 21.5% for the same period in 2021. The increase in effective rate from 21.5% in the year ago quarter to 22.9% for the three months ended September 30, 2022 was primarily driven by the increase in state and local taxes resulting from the CIT Merger. The decrease in the ETR from 24.2% for the three months ended June 30, 2022 to 22.9% for the three months ended September 30, 2022 was primarily driven by the effects of changes from enacted state tax laws. The decrease in the ETR from 22.6% for the nine months ended September 30, 2021 to 13.3% for the nine months ended September 30, 2022 was driven by the non-taxable nature of the preliminary bargain purchase gain arising from the CIT Merger.

The ETR each quarter is impacted by a number of factors, including the relative mix of domestic and international earnings, effects of changes in enacted tax laws, adjustments to valuation allowances, and discrete items. The ETR in future periods may vary from the actual 2022 ETR due to changes in these factors.

We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expense and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors.

See Note 20 — Income Taxes for additional information.

RESULTS BY BUSINESS SEGMENT

Prior to the CIT Merger, BancShares operated with centralized management and combined reporting and, therefore, BancShares operated as one consolidated reportable segment. In connection with the CIT Merger, we made changes to reflect the inclusion of CIT operations and to reflect how we manage the combined business. As summarized in the sections below, BancShares now reports financial results in three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. We conformed prior period comparisons to this new segment presentation. Based on the approach for segment disclosures, the substantial majority of BancShares’ operations for historical periods prior to the CIT Merger are reflected in the General Banking segment. See Note 22 — Business Segments for related disclosures on the segments.

Results in our business segments reflect our funds transfer policy and allocation of expenses. Unallocated balances and, when applicable, certain select items, are reflected in Corporate.

General Banking

General Banking delivers services to individuals and businesses through an extensive branch network, digital banking, telephone banking and various ATM networks, including a full suite of deposit products, loans (primarily residential mortgages and commercial loans), and various fee-based services. General Banking also provides a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services; and deposit, cash management and lending to HOA and property management companies. As part of the CIT Merger, CAB products were added that will drive the associated HOA deposit channel. Revenue is primarily generated from interest earned on residential mortgages, small business loans and fees for banking services.

Table 8

General Banking: Financial Data and Metrics


dollars in millions	Three Months Ended						Nine Months Ended
Earnings Summary	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net interest income	$	495	$	468	$	363	$	1,400	$	1,071
Provision (benefit) for credit losses	2		7		(1)		(7)		(32)
Net interest income after provision (benefit) for credit losses	493		461		364		1,407		1,103
Noninterest income	118		126		110		365		325
Noninterest expense	410		391		295		1,210		875
Income before income taxes	201		196		179		562		553
Income tax expense	55		40		38		134		125
Net income	$	146	$	156	$	141	$	428	$	428
Select Period End Balances
Loans and leases	$	41,693	$	40,444	$	31,849	$	41,693	$	31,849
Deposits	82,730		83,535		49,992		82,730		49,992

Results for the 2022 periods reflect the additional activity from the CIT Merger, which were not included in 2021 income statements.

Net income for the three months ended September 30, 2022 decreased compared to the three months ended June 30, 2022, reflecting higher NII, mostly due to growth in the loan portfolio, offset by lower noninterest income, higher noninterest expenses and higher taxes. Noninterest income for the three months ended September 30, 2022 decreased compared to the three months ended June 30, 2022, reflecting lower service charges on deposits. Noninterest expenses for the three months ended September 30, 2022 increased compared to the three months ended June 30, 2022, reflecting items discussed previously in the section entitled “Noninterest Expenses” of this MD&A. Net income compared to the 2021 periods was relatively unchanged as higher NII and noninterest income was essentially offset by higher expense levels, resulting from the increased size due to the CIT Merger.

Loans and leases at September 30, 2022 increased from June 30, 2022 reflecting strong demand through our branch network. Growth was primarily concentrated in commercial and business loans. Our consumer mortgage loans also grew, reflecting lower prepayments and originating loans that were held on-balance sheet. Compared to September 30, 2021, loans and leases increased reflecting the additional residential mortgages and consumer loans acquired in the CIT Merger, partially offset by run-off of SBA-PPP loans.

Deposits include deposits from the branch, online and CAB channels. The additional branches acquired in the CIT Merger were mostly in California. Deposits at September 30, 2022 were down from June 30, 2022, driven by lower money market accounts, partially offset by an increase in savings accounts. While deposits were down in our branch network, deposits from our direct banking grew. The increase compared to September 30, 2021 reflects deposits acquired in the CIT Merger. See consolidated discussions in the sections entitled “Net Interest Income,” “Net Interest Margin” and “Balance Sheet Analysis—Deposits” of this MD&A for additional information.

Commercial Banking

Commercial Banking provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across various industries. Commercial Banking also provides asset-based lending, factoring, receivables management products and supply chain financing. Revenue is primarily generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities and banking services, along with capital markets transactions and commissions earned on factoring and related activities.

We provide factoring, receivable management, and secured financing to businesses (our clients, who are generally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e., sold or assigned to the factor).

Table 9

Commercial Banking: Financial Data and Metrics


dollars in millions	Three Months Ended						Nine Months Ended
Earnings Summary	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net interest income	$	230	$	203	$	5	$	641	$	12
Provision for credit losses	58		35		—		60		—
Net interest income after provision for credit losses	172		168		5		581		12
Noninterest income	133		129		—		376		—
Noninterest expense	186		180		1		557		3
Income before income taxes	119		117		4		400		9
Income tax expense	25		24		1		90		2
Net income	$	94	$	93	$	3	$	310	$	7
Select Period End Balances
Loans and leases	$	28,023	$	27,220	$	667	$	28,023	$	667
Deposits	3,682		4,449		73		3,682		73

Results for the 2022 periods primarily reflect activity from the former CIT businesses, which were not included in 2021 periods.

Net income for the three months ended September 30, 2022 was essentially unchanged compared to the three months ended June 30, 2022, reflecting higher NII and noninterest income, which offset higher provision for credit losses and noninterest expenses. The provision for credit losses for the three months ended September 30, 2022 reflects moderate deterioration in the macroeconomic forecasts and loan portfolio growth. For the three months ended September 30, and June 30, 2022, noninterest income included rental income on operating lease equipment of $54 million and $53 million, respectively, and $155 million for the nine months ended September 30, 2022. Noninterest expense includes operating expenses and depreciation on operating lease equipment. Noninterest expenses for the three months ended September 30, 2022 increased compared to the three months ended June 30, 2022, reflecting items discussed previously in the section entitled “Noninterest Expense” of this MD&A. Depreciation on operating lease equipment totaled $43 million for the three months ended September 30, 2022 and $42 million for the three months ended June 30, 2022 ($125 million for the nine months ended September 30, 2022).

Loans and leases at September 30, 2022 increased from June 30, 2022, reflecting growth in a number of our industry verticals, such as healthcare and technology, and small business lending, while middle market banking was down. The increase in loans and leases and deposits for the 2022 periods compared to 2021 was driven by those acquired in the CIT Merger.

Rail

Table 10

Rail: Financial Data and Metrics


dollars in millions	Three Months Ended						Nine Months Ended
Earnings Summary	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Rental income on operating leases	$	165	$	160	$	—	$	485	$	—
Depreciation on operating lease equipment	44		47		—		132		—
Maintenance and other operating lease expenses	52		47		—		142		—
Net revenue on operating leases(1)	69		66		—		211		—
Interest expense, net	20		18		—		57		—
Noninterest income	6		—		—		8		—
Operating expenses	15		16		—		47		—
Income before income taxes	40		32		—		115		—
Income tax expense	10		8		—		28		—
Net income	$	30	$	24	$	—	$	87	$	—
Select Period End Balances
Operating lease equipment, net	$	7,248	$	7,247	$	—	$	7,248	$	—

(1) Net revenue on operating leases is a non-GAAP measure. See the “Non-GAAP Financial Measures” section for a reconciliation from the GAAP measure (segment net income) to the non-GAAP measure (net revenue on operating leases).

Net income and net revenue on operating leases are utilized to measure the profitability of our Rail segment. Net revenue on operating leases reflects rental income on operating lease equipment less depreciation, maintenance and other operating lease expenses. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable. Due to the nature of our portfolio, which is essentially all operating lease equipment, certain financial measures commonly used by banks, such as NII, are not as meaningful for this business. NII is not used because it includes the impact of debt costs of our operating lease assets but excludes the associated rental income.

Net income and net revenue on operating leases for the three months ended September 30, 2022 were $30 million and $69 million, respectively, both up from the three months ended June 30, 2022. Depreciation is recognized on railcars, and the prior quarter included higher costs driven by adjustments to residual values. Maintenance and other operating lease expenses increased from the prior quarter, reflecting higher costs for railcars put back on lease and inflationary pressures. Other noninterest income for the three months ended September 30, 2022 reflects a $5 million settlement gain related to returned equipment.

Our fleet is diverse and the average re-pricing of equipment upon lease maturities was 105% of the average prior or expiring lease rate during the quarter. Our railcar utilization, including commitments to lease, at September 30, 2022 was 96.2%, unchanged from June 30, 2022.

Portfolio

Rail customers include all of the U.S. and Canadian Class I railroads (i.e., railroads with annual revenues of approximately $500 million and greater), other railroads, as well as manufacturers and commodity shippers. Our total operating lease fleet at September 30, 2022 consisted of approximately 118,500 railcars, down slightly from June 30, 2022. The following table reflects the proportion of railcars by type based on units and net investment, respectively:

Table 11

Operating lease Railcar Portfolio by Type (units and net investment)


	September 30, 2022				June 30, 2022
Railcar Type	Total Owned Fleet - % Total Units		Total Owned Fleet - % Total Net Investment		Total Owned Fleet - % Total Units		Total Owned Fleet - % Total Net Investment
Covered Hoppers	43	%	40	%	42	%	40	%
Tank Cars	30	%	41	%	30	%	41	%
Mill/Coil Gondolas	8	%	6	%	8	%	6	%
Coal	8	%	1	%	8	%	1	%
Boxcars	6	%	7	%	6	%	7	%
Other	5	%	5	%	6	%	5	%
Total	100	%	100	%	100	%	100	%

Table 12

Rail Operating Lease Equipment by Obligor Industry


dollars in millions	September 30, 2022				June 30, 2022
Manufacturing	$	2,985	41	%	$	3,057	42	%
Rail	2,010		28	%	1,937		27	%
Wholesale	991		14	%	980		14	%
Oil and gas extraction / services	538		7	%	556		8	%
Energy and utilities	245		3	%	237		3	%
Other	479		7	%	480		6	%
Total	$	7,248	100	%	$	7,247	100	%

Corporate

Certain items that are not allocated to operating segments are included in the Corporate segment. Some of the more significant and recurring items include interest income on investment securities, a portion of interest expense primarily related to corporate funding costs (including brokered deposits), income on BOLI (other noninterest income), merger-related expenses, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporate also includes certain significant items that are infrequent, such as the Initial Non-PCD Provision for loans and leases and unfunded commitments, and the preliminary gain on acquisition, both of which related to the CIT Merger.

Table 13

Corporate: Financial Data and Metrics


dollars in millions	Three Months Ended						Nine Months Ended
Earnings Summary	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net interest income (expense)	$	90	$	47	$	(21)	$	161	$	(50)
Provision for credit losses	—		—		—		513		—
Net interest income (expense) after provision for credit losses	90		47		(21)		(352)		(50)
Noninterest income	12		9		14		473		69
Noninterest expense	54		64		18		228		33
Income (loss) before income taxes	48		(8)		(25)		(107)		(14)
Income tax expense (benefit)	3		10		(5)		(123)		(3)
Net income (loss)	$	45	$	(18)	$	(20)	$	16	$	(11)

Results for 2022 were driven by impacts from the CIT Merger. Results for the three months ended September 30, 2022 benefited from higher NII reflecting higher interest income. Included in noninterest expenses for the 2022 periods were $33 million, $34 million and $202 million of merger-related expenses, for the three months ended September 30, 2022, June 30, 2022 and nine months ended September 30, 2022, respectively. In addition to these items, the nine months ended September 30, 2022 also included a provision for credit losses of $513 million related to the Initial Non-PCD Provision, a preliminary gain on acquisition of $431 million and a benefit of approximately $27 million related to the termination of certain legacy CIT retiree benefit plans in noninterest expenses.

BALANCE SHEET ANALYSIS

INTEREST-EARNING ASSETS

Interest-earning assets include interest-bearing cash, investment securities, assets held for sale and loans and leases, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Higher risk investments typically carry a higher interest rate but expose us to higher levels of market and/or credit risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.

Interest-earning Deposits at Banks

Interest-earning deposits at banks at September 30, 2022 totaled $6.2 billion. This was down from $6.5 billion at June 30, 2022 and $9.1 billion at December 31, 2021. These declines related to lower deposits, loan growth, and the timing of investment maturities. While the CIT Merger added approximately $2.9 billion of interest-earning deposits at banks as of the Merger Date, that amount was offset by the use of cash for the redemption of approximately $2.9 billion of assumed debt from the CIT Merger in February.

Investment Securities

The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note 1 — Accounting Policies and Basis of Presentation and Note 3 — Investments for additional disclosures regarding investment securities.

The carrying value of investment securities at September 30, 2022 totaled $18.8 billion. This was down from $19.1 billion at June 30, 2022, reflecting investment security purchases of $0.5 billion, maturities and paydowns of $0.5 billion, and the remaining due to change in fair value. The increase from $13.1 billion at December 31, 2021 primarily reflected the CIT Merger, which added $6.6 billion. The remaining year to date activity in the portfolio included investment securities purchases of $1.8 billion, partially offset by maturities and paydowns of $1.7 billion, and fair value changes.

Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of AOCI, net of deferred taxes. As of September 30, 2022, investment securities available for sale had a net pre-tax unrealized loss of $995 million, compared to a net pre-tax unrealized loss of $647 million as of June 30, 2022 and $12 million as of December 31, 2021. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of the investment securities portfolio generally decreases when interest rates increase or when credit spreads widen. Management evaluated the available for sale securities in an unrealized loss position and concluded that the unrealized losses related to changes in interest rates relative to when the securities were purchased, and therefore BancShares management determined that no ACL was needed at September 30, 2022.

Table 14 presents the investment securities portfolio at September 30, 2022, June 30, 2022, and December 31, 2021, segregated by major category.

Table 14

Investment Securities


dollars in millions	September 30, 2022						June 30, 2022						December 31, 2021
	Composition(1)		Amortized cost		Fair value		Composition(1)		Amortized cost		Fair value		Composition(1)		Amortized cost		Fair value
Investment securities available for sale:
U.S. Treasury	11.0	%	$	2,047	$	1,900	10.5	%	$	2,005	$	1,903	15.4	%	$	2,007	$	2,005
Government agency	1.0	%	175		173		1.1	%	191		190		1.7	%	221		221
Residential mortgage-backed securities	27.6	%	5,450		4,784		27.7	%	5,448		5,020		36.2	%	4,757		4,729
Commercial mortgage-backed securities	9.6	%	1,828		1,673		8.4	%	1,632		1,527		12.6	%	1,648		1,640
Corporate bonds	3.2	%	583		558		3.1	%	581		570		4.7	%	582		608

Total investment securities available for sale	52.4	%	$	10,083	$	9,088	50.8	%	$	9,857	$	9,210	70.6	%	$	9,215	$	9,203
Investment in marketable equity securities	0.5	%	$	73	$	92	0.5	%	$	73	$	94	0.7	%	$	73	$	98
Investment securities held to maturity:
U.S. Treasury	2.4	%	$	473	$	419	2.4	%	$	472	$	437	—	%	$	—	$	—
Government agency	7.8	%	1,546		1,350		7.9	%	1,544		1,424		—	%	—		—
Residential mortgage-backed securities	21.6	%	4,510		3,745		22.8	%	4,633		4,119		17.7	%	2,322		2,306
Commercial mortgage-backed securities	13.8	%	2,834		2,397		14.1	%	2,886		2,563		11.0	%	1,485		1,451
Supranational securities	1.5	%	295		252		1.5	%	294		266		—	%	—		—
Other investments	—	%	3		3		—	%	3		3		—	%	2		2
Total investment securities held to maturity	47.1	%	$	9,661	$	8,166	48.7	%	$	9,832	$	8,812	28.7	%	$	3,809	$	3,759
Total investment securities	100	%	$	19,817	$	17,346	100	%	$	19,762	$	18,116	100	%	$	13,097	$	13,060
(1) Calculated as a percent of the total fair value of investment securities.

Table 15 presents the weighted average yields for investment securities available for sale and held to maturity at September 30, 2022, segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio is calculated using security-level annualized yields.

Table 15

Weighted Average Yield on Investment Securities


	September 30, 2022
	Within One Year		One to Five Years		Five to 10 Years		After 10 Years		Total
Investment securities available for sale:
U.S. Treasury	3.25	%	0.96	%	—	%	—	%	1.01	%
Government agency	4.42	%	4.58	%	4.09	%	4.14	%	4.09	%
Residential mortgage-backed securities	1.09	%	2.38	%	2.12	%	1.78	%	1.78	%
Commercial mortgage-backed securities	4.06	%	3.55	%	5.37	%	2.71	%	2.86	%
Corporate bonds	5.00	%	6.61	%	5.28	%	4.67	%	5.40	%

Total investment securities available for sale	3.65	%	1.42	%	4.84	%	1.99	%	2.07	%

Investment securities held to maturity:
U.S. Treasury	—	%	1.37	%	1.57	%	—	%	1.38	%
Government agency	0.44	%	1.36	%	1.75	%	—	%	1.49	%
Residential mortgage-backed securities(1)	—	%	4.03	%	3.71	%	1.76	%	1.76	%
Commercial mortgage-backed securities(1)	—	%	—	%	2.20	%	1.83	%	1.83	%
Supranational Securities	—	%	1.23	%	1.64	%	—	%	1.56	%
Other investments	0.78	%	—	%	—	%	—	%	0.78	%
Total investment securities held to maturity	0.46	%	1.36	%	1.73	%	1.79	%	1.72	%

(1) Residential mortgage-backed and commercial mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans.

Assets Held for Sale

Assets held for sale at September 30, 2022 were $21 million, of which $18 million related to loans and the remainder to non-interest earning operating lease equipment. Assets held for sale totaled $38 million at June 30, 2022 and $99 million at December 31, 2021. The declines were primarily due to loan sales.

Certain residential real estate loans and commercial loans are originated to be sold to investors or lenders, respectively, and are recorded in assets held for sale at fair value. In addition, BancShares may change its strategy for certain portfolio loans and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value.

Loans and Leases

Loans and leases held for investment at September 30, 2022 were $69.8 billion, an increase from $67.7 billion, at June 30, 2022. Our commercial loans were up $1.5 billion from June 30, 2022. We continued to see strong loan growth in our branch network, as well as commercial banking. The increase in our branch network loans was driven by higher commercial loans. In commercial banking, growth was in a number of our industry verticals, such as healthcare and technology, and small business lending, while middle market banking was down. We also had growth in consumer mortgage loans. Our consumer loans were up $0.6 billion from June 30, 2022. Total loans and leases increased from $32.4 billion at December 31, 2021, reflecting the addition of $32.7 billion from the CIT Merger and the above noted activity, partially offset by a reduction in SBA-PPP loans.

Upon completion of the CIT Merger, we re-evaluated our loan classes to reflect the risk characteristics of the combined portfolio. BancShares reports its commercial loan portfolio in the following classes: commercial construction, owner occupied commercial mortgage, non-owner occupied commercial mortgage, commercial and industrial, and leases. The consumer portfolio includes residential mortgage, revolving mortgage, consumer auto and consumer other. Commercial loans at September 30, 2022 were $53.0 billion compared to $51.5 billion at June 30, 2022 and $22.6 billion at December 31, 2021, representing 76%, 76% and 70% of total loans and leases, respectively. Consumer loans at September 30, 2022 were $16.8 billion, compared to $16.3 billion at June 30, 2022 and $9.8 billion at December 31, 2021, representing 24%, 24% and 30% of total loans and leases, respectively.

Table 16

Loans and Leases


dollars in millions	September 30, 2022		June 30, 2022		December 31, 2021
Commercial:
Commercial construction	$	2,752	$	2,783	$	1,238
Owner occupied commercial mortgage	14,053		13,795		12,099
Non-owner occupied commercial mortgage	9,683		9,167		3,041
Commercial and industrial	24,288		23,554		5,937
Leases	2,184		2,178		271
Total commercial	$	52,960	$	51,477	$	22,586
Consumer:
Residential mortgage	12,910		12,441		6,088
Revolving mortgage	1,923		1,893		1,818
Consumer auto	1,385		1,338		1,332
Consumer other	612		586		548
Total consumer	$	16,830	$	16,258	$	9,786
Total loans and leases	69,790		67,735		32,372
Less allowance for credit losses	882		850		178
Net loans and leases	$	68,908	$	66,885	$	32,194

The discount related to acquired loans was $131 million, $146 million and $40 million at September 30, 2022, June 30, 2022 and December 31, 2021, respectively.

OPERATING LEASE EQUIPMENT, NET

As detailed in the following table, our operating lease portfolio is mostly comprised of rail assets. See the Rail segment discussion in the section entitled “Results by Business Segment” of this MD&A for further details on the rail portfolio.

Table 17

Operating Lease Equipment


dollars in millions	September 30, 2022		June 30, 2022
Railcars and locomotives	$	7,248	$	7,247
Other equipment	736		724
Total(1)	$	7,984	$	7,971

(1)Includes off-lease Rail equipment of $509 million at September 30, 2022 and $492 million at June 30, 2022.

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debt, and other borrowings. Interest-bearing liabilities at September 30, 2022 totaled $69.3 billion, compared to $67.1 billion at June 30, 2022 and $31.8 billion at December 31, 2021. As discussed further below, the increase from June 30, 2022 reflects lower deposits offset by higher FHLB borrowings. The increase from December 31, 2021 was mostly due to deposits and borrowings from the CIT Merger, partially offset by current year activity that included post-merger decline in deposits, the redemption of assumed debt during the first quarter, and higher FHLB borrowings. See Note 2 — Business Combinations for details on deposits and borrowings associated with the CIT Merger.

Deposits

Total deposits at September 30, 2022 were $87.6 billion, a decrease of $1.8 billion compared to June 30, 2022 and an increase of $36.1 billion compared to December 31, 2021. Interest-bearing deposits totaled $61.0 billion, $62.7 billion and $30.0 billion at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. Noninterest-bearing deposits totaled $26.6 billion, $26.6 billion and $21.4 billion at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. During the quarter deposits in our branch network and commercial customers were down, partially offset by our growth in direct banking deposits. Total deposits declined during the second quarter and continued lower in the third quarter, reflecting the most rate sensitive customers moving funds in response to increases in the federal funds rate. The decline in total deposits compared to June 30, 2022 was driven by lower money market accounts, partially offset by an increase in savings accounts.

The reduction in deposits since the CIT Merger have been primarily concentrated in acquired higher cost channels, including legacy OneWest branches and the Direct Bank. These declines were partially offset by growth in noninterest-bearing deposits, primarily from our branch network. The increase in total deposits as compared to December 31, 2021 was driven by the $39.4 billion of deposits acquired in the CIT Merger, partially offset by the noted declines. As part of the CIT Merger, we acquired CIT’s online banking platform and an HOA deposit channel.

Table 18

Deposits


dollars in millions	September 30, 2022		June 30, 2022		December 31, 2021
Noninterest-bearing demand	$	26,587	$	26,645	$	21,405
Checking with interest	16,118		16,285		12,694
Money market	21,818		24,699		10,590
Savings	14,722		13,319		4,236
Time	8,308		8,381		2,481
Total deposits	$	87,553	$	89,329	$	51,406

We strive to maintain a strong liquidity position, and therefore a focus on core deposit retention remains a key business objective. We believe traditional bank deposit products remain an attractive option for many customers. As economic conditions change, we recognize that our liquidity position could be adversely affected if bank deposits are withdrawn. Our ability to fund future loan growth is significantly dependent on our success in retaining existing deposits and generating new deposits at a reasonable cost.

Where information is not readily available to determine the amount of insured deposits, the amount of uninsured deposits is estimated, consistent with the methodologies and assumptions utilized in providing information to the Bank’s regulators. We estimate total uninsured deposits were $31.0 billion and $23.0 billion at September 30, 2022 and December 31, 2021, respectively. Table 19 provides the expected maturity of time deposits in excess of $250,000, the FDIC insurance limit, as of September 30, 2022.

Table 19

Maturities of Time Deposits In Excess of $250,000


dollars in millions	September 30, 2022
Time deposits maturing in:
Three months or less	$	296
Over three months through six months	206
Over six months through 12 months	766
More than 12 months	215
Total	$	1,483

Borrowings

Total borrowings at September 30, 2022 were $8.3 billion, compared to $4.5 billion at June 30, 2022 and $1.8 billion at December 31, 2021. The increase from June 30, 2022 primarily reflected third quarter FHLB borrowings of $4.5 billion, partially offset by repayments of $0.5 billion. Of the net new FHLB borrowings remaining at September 30, 2022, $2.6 billion and $1.6 billion were short-term and long-term, respectively. The increase in borrowings in the third quarter was to replace declines in interest-bearing deposits and support the loan growth. In addition, during the third quarter we repaid a $61 million senior unsecured term loan that matured. The increase from December 31, 2021 also reflected $4.5 billion of debt assumed in the CIT Merger, partially offset by a debt redemption of approximately $2.9 billion in February.

Table 20 presents borrowings, including the respective unamortized purchase accounting adjustments and issuance costs.

Table 20

Borrowings


dollars in millions	September 30, 2022		June 30, 2022		December 31, 2021
Securities sold under customer repurchase agreements	$	578	$	646	$	589
Federal Home Loan Bank borrowings
Floating rate notes due through September 2025	5,800		1,650		—
Fixed rate notes due through March 2032	—		135		645
Senior Unsecured Borrowings
3.929% fixed-to-floating rate notes due June 2024(1)	508		510		—
2.969% fixed-to-floating rate notes due September 2025(1)	321		322		—
6.000% fixed rate notes due April 2036(1)	59		60		—
Subordinated debt
6.125% fixed rate notes due March 2028(1)	472		475		—
4.125% fixed-to-fixed rate notes due November 2029(1)	102		102		—
3.375% fixed-to-floating rate notes due March 2030	348		348		347
Macon Capital Trust I - floating rate debenture due March 2034	14		14		14
SCB Capital Trust I - floating rate debenture due April 2034	10		10		11
FCB/SC Capital Trust II - floating rate debenture due June 2034	18		18		18
FCB/NC Capital Trust III - floating rate debenture due June 2036	88		88		88
Total subordinated debt	1,052		1,055		478
Other borrowings	25		81		72
Total borrowings	$	8,343	$	4,459	$	1,784

(1) Denotes outstanding debt assumed in the CIT Merger.

See Note 12 — Borrowings for further information on the various components. Also see Liquidity Risk later in this MD&A.

RISK MANAGEMENT

BancShares provided detail risk management information in our 2021 Form 10-K. The following is a summary of those disclosures or updates to those disclosures, primarily due to the CIT Merger.

Risk is inherent in any business. BancShares has defined a moderate risk appetite, a balanced approach to risk taking, with a philosophy which does not preclude higher risk business activities commensurate with acceptable returns while meeting regulatory objectives. Through the comprehensive Risk Management Framework and Risk Appetite Framework, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares may be exposed, with effective challenge and oversight by management committees. In addition, the Board strives to ensure the business culture is integrated with the Risk Management program and policies, procedures and metrics for identifying, assessing, monitoring and managing risk are part of the decision-making process. The Board’s role in risk oversight is an integral part of our overall Risk Management Framework and Risk Appetite Framework. The Board administers its risk oversight function primarily through the Board Risk Committee.

The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the full Board regarding risk exposures, including Credit, Market, Capital, Liquidity, Operational, Compliance, Asset, Strategic and Reputational risks; review, approve, and monitor adherence to the Risk Appetite Statement and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also reviews reports of examination by and communications from regulatory agencies, the results of internal and third party testing and qualitative and quantitative assessments related to risk management, and any other matters within the scope of the Board Risk Committee’s oversight responsibilities. The Board Risk Committee monitors management’s response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, compensation risk management and other areas of joint responsibility.

In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.

BancShares is subject to a variety of risks that may arise through its business activities. As identified in our 2021 Form 10-K, our primary risks are credit, market, capital, liquidity, operational, compliance, strategic and reputational risks. Due to the CIT Merger, further below we added asset risk (due to the operating lease portfolio) as a primary risk and enhanced our credit risk to highlight counterparty risk (due to the increased use of derivatives).

Given several factors including but not limited to positive internal and external trends, positive risk metrics, effective incident, oversight and monitoring, the Company returned to business as usual operations and lifted internal COVID-19 related restrictions in early April. BancShares will continue to comply with any state and local orders that are in place. Monitoring of associated credit and operational risks has now been integrated into normal risk monitoring activities.

Since the filing of our 2021 Form 10-K, BancShares has been assessing the emerging impacts of the rising international tensions that could impact the economy and exacerbate headwinds of rising inflation, elevated market volatility, global supply chain disruptions, and recessionary pressures as well as operational risks such as those associated with potential cyber-attacks for FCB and third parties upon whom it relies. Assessments have not identified material impacts to date, but those assessments will remain ongoing as the condition continues to exist.

CREDIT RISK

Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an appropriate ACL that accounts for expected losses over the life of the loan and lease portfolios.

Commercial Lending and Leasing

Commercial loans and leases acquired in the CIT Merger, which are primarily within the Commercial Banking segment, are graded according to a rating system that was used by CIT prior to the merger with respect to probability of obligor default (“PD”) and loss given default (severity) based on various risk factors. The PD and severity are derived through historical observations of default and subsequent losses within each risk grading. When these loans and leases were graded at underwriting, or when updated periodically, a model is run to generate a preliminary risk rating. The model incorporates both internal and external historical default and loss data to develop loss rates for each risk rating. The preliminary risk rating assigned by the model can be adjusted as a result of borrower specific facts that in management’s judgment warrant a modification of the modeled risk rating to arrive at the final approved risk ratings.

For small-ticket lending and leasing portfolio acquired in the CIT Merger, automated credit scoring models for origination (scorecards) and re-grading (auto re-grade algorithms) are also employed. These are supplemented by business rules and expert judgment. Adjustments to credit scorecards, auto re-grading algorithms, business rules and lending programs may be made periodically based on these evaluations. A credit approval hierarchy is enforced to ensure that an underwriter with the appropriate level of authority reviews applications.

Consumer Lending

Consumer lending begins with an evaluation of a consumer borrower’s credit profile against published standards. Credit decisions are made after analyzing quantitative and qualitative factors, including borrower’s ability to repay the loan, collateral values, and considering the transaction from a judgmental perspective.

Consumer products use traditional and measurable standards to document and assess the creditworthiness of a loan applicant. Credit standards follow industry standard documentation requirements. Performance is largely evaluated based on an acceptable pay history along with a quarterly assessment which incorporates current market conditions. Non-traditional loans may also be monitored by way of a quarterly review of the borrower’s refreshed credit score. Loans are placed on non-accrual status at 90 days past due or more, except for government guaranteed loans. When warranted, an additional review of the underlying collateral’s loan-to-value may be conducted.

Allowance for Credit Losses

The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. Forecasted economic conditions are developed using third party macroeconomic scenarios and may be adjusted based on management’s expectations over the lives of the portfolios. Significant macroeconomic factors used in estimating the expected losses include unemployment, GDP, home price index, commercial real estate index, corporate profits, and credit spreads.

The ACL at September 30, 2022 was $882 million, compared to $850 million at June 30, 2022 and $178 million at December 31, 2021. The ACL as a percentage of total loans and leases at September 30, 2022 was 1.26%, compared to 1.26% at June 30, 2022 and 0.55% at December 31, 2021.

The ACL at September 30, 2022 increased compared to June 30, 2022 primarily due to moderate deterioration in the macroeconomic forecasts related to GDP, interest rates, home prices, and commercial real estate prices. In contemplation of additional uncertainty, primarily based on the elevated levels of inflation and its impact on other macroeconomic variables such as interest rates, which could in turn impact home prices, commercial real estate values, and other variables, we do not believe the current baseline scenario fully incorporates the potential downside impacts of future macroeconomic deterioration, so an additional weighting on the downside scenario was incorporated into the estimate. In the three months ended September 30, 2022, the ACL on commercial loans increased $26 million and the ACL on consumer portfolios increased $6 million.

Compared to December 31, 2021, the increase in the ACL at September 30, 2022 on commercial portfolios was $686 million and $18 million on the consumer portfolios. The increases were primarily due to the impact of the CIT Merger, as well as the above noted moderate deterioration in the macroeconomic forecasts and loan growth. The initial ACL for PCD loans and leases acquired in the CIT Merger (the “Initial PCD ACL”) of $272 million was established through the PCD Gross-Up and there was no corresponding increase to the provision for credit losses. The PCD Gross-Up is discussed further in Note 2 — Business Combinations. The initial ACL for Non-PCD loans and leases acquired in the CIT Merger was established through a corresponding increase of $454 million to the provision for credit losses for the “Initial Non-PCD Provision”. In addition to the impact on the ACL from the CIT Merger, revisions to the CECL macroeconomic forecasts during 2022 impacted the ACL. The loss estimates were also influenced by BancShares’ strong credit quality and low net charge-offs.

While management utilizes its best judgment and information available, the ACL is dependent upon factors that are inherently difficult to predict, the most significant being the factors in the economic scenarios. ACL estimates in these scenarios ranged from approximately $630 million to approximately $1.1 billion. BancShares management determined that an ACL of $882 million was appropriate as of September 30, 2022.

Table 21

Allowance for Credit Losses


dollars in millions	Three Months Ended September 30, 2022
	Commercial			Consumer			Total
Balance at June 30, 2022	$	740		$	110		$	850
Initial PCD ACL(1)	—			—			—

Provision for credit losses - loans and leases	43			7			50

Charge-offs(1)	(28)			(5)			(33)
Recoveries	11			4			15

Balance at September 30, 2022	$	766		$	116		$	882
Annualized net charge-off ratio							0.10		%
Net charge-offs (recoveries)	$	17		$	1		$	18
Average loans							$	68,795
Percent of loans in each category to total loans	76		%	24		%	100		%

	Three Months Ended June 30, 2022
	Commercial			Consumer			Total
Balance at March 31, 2022	$	743		$	105		$	848
Initial PCD ACL(1)	(12)			—			(12)

Provision for credit losses - loans and leases	33			3			36

Charge-offs(1)	(36)			(5)			(41)
Recoveries	12			7			19

Balance at June 30, 2022	$	740		$	110		$	850
Annualized net charge-off ratio							0.13		%
Net charge-offs (recoveries)	$	24		$	(2)		$	22
Average loans							$	66,431
Percent of loans in each category to total loans	76		%	24		%	100		%

	Three Months Ended September 30, 2021
	Commercial			Consumer			Total
Balance at June 30, 2021	$	86		$	103		$	189
Provision (benefit) for credit losses - loans and leases	—			(1)			(1)
Charge-offs	(7)			(4)			(11)
Recoveries	3			3			6

Balance at September 30, 2021	$	82		$	101		$	183
Annualized net charge-off ratio							0.06		%
Net charge-offs	$	4		$	1		$	5
Average loans							$	32,608
Percent of loans in each category to total loans	70		%	30		%	100		%

(1) The Initial PCD ACL related to the CIT Merger was $272 million, net of an additional $243 million for loans that CIT charged-off prior to the Merger Date (whether full or partial) which met BancShares’ charge-off policy at the Merger Date. The $12 million reflects second quarter adjustment to the original amount recorded on the Merger Date, with an equal adjustment to the UPB of PCD loans. There was no income statement impact or adjustment to the purchase price.


dollars in millions	Nine Months Ended September 30, 2022
	Commercial			Consumer			Total
Balance at December 31, 2021	$	80		$	98		$	178
Initial PCD ACL(1)	258			14			272
Initial Non-PCD Provision	432			22			454
Provision (benefit) for credit losses - loans and leases	53			(20)			33
Total provision (benefit) for credit losses - loans and leases	485			2			487
Charge-offs(1)	(92)			(15)			(107)
Recoveries	35			17			52

Balance at September 30, 2022	$	766		$	116		$	882
Annualized net charge-off ratio							0.11		%
Net charge-offs (recoveries)	$	57		$	(2)		$	55
Average loans							$	66,816
Percent of loans in each category to total loans	76		%	24		%	100		%

	Nine Months Ended September 30, 2021
	Commercial			Consumer			Total
Balance at December 31, 2020	$	92		$	133		$	225
Benefit for credit losses - loans and leases	(3)			(29)			(32)
Charge-offs	(14)			(13)			(27)
Recoveries	7			10			17

Balance at September 30, 2021	$	82		$	101		$	183
Annualized net charge-off ratio							0.04		%
Net charge-offs	$	7		$	3		$	10
Average loans							$	32,872
Percent of loans in each category to total loans	70		%	30		%	100		%

(1) See footnote to table above.

Net charge-offs during the three months ended September 30, 2022 were $18 million, compared to $22 million during the second quarter of 2022 and $5 million during the third quarter of 2021. On an annualized basis, the net charge-off ratio was 0.10%, 0.13% and 0.06% for the three months ended September 30, 2022, June 30, 2022 and September 30, 2021, respectively. Net charge-offs for the nine months ended September 30, 2022 and 2021 were $55 million (net charge-off ratio of 0.11%) and $10 million (net charge-off ratio of 0.04%), respectively. The increase in net charge-offs compared to the 2021 periods reflects the impact from the loans acquired in the CIT Merger.

The following table provides trends in the ACL ratios.

Table 22

Allowance for Credit Losses Ratios


dollars in millions	September 30, 2022			June 30, 2022			December 31, 2021
Allowance for credit losses	$	882		$	850		$	178
Total loans and leases	$	69,790		$	67,735		$	32,372
Allowance for credit losses to total loans and leases:	1.26		%	1.26		%	0.55		%
Commercial loans and leases:
Allowance for credit losses - commercial	$	766		$	740		$	80
Commercial loans and leases	$	52,960		$	51,477		$	22,586
Commercial allowance for credit losses to commercial loans and leases:	1.44		%	1.43		%	0.35		%
Consumer loans:
Allowance for credit losses - consumer	$	116		$	110		$	98
Consumer loans	$	16,830		$	16,258		$	9,786
Consumer allowance for credit losses to consumer loans:	0.70		%	0.69		%	1.01		%

The reserve for unfunded loan commitments was $91 million, $81 million and $12 million at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. The increase of $10 million compared to June 30, 2022 was driven by moderate deterioration in the macroeconomic forecasts. The 2022 increases from December 31, 2021 were primarily driven by the additional commitments from the CIT Merger. The additional off-balance sheet commitments primarily reflect loan commitments or lines of credit and DPAs. See Note 23 — Commitments and Contingencies for information relating to off-balance sheet commitments and Note 5 — Allowance for Credit Losses for a roll forward of the ACL for unfunded commitments.

Credit Metrics

Non-performing Assets

Non-performing assets include non-accrual loans and leases and OREO. Non-performing assets at September 30, 2022 totaled $508 million, compared to $558 million at June 30, 2022 and $161 million at December 31, 2021.

The following table presents total nonperforming assets.

Table 23

Non-Performing Assets


dollars in millions	September 30, 2022			June 30, 2022			December 31, 2021
Non-accrual loans:
Commercial loans	$	356		$	413		$	45
Consumer loans	98			100			76
Total non-accrual loans	$	454		$	513		$	121
Other real estate owned	54			45			40
Total non-performing assets	$	508		$	558		$	161

Allowance for credit losses to total loans and leases:	1.26		%	1.26		%	0.55		%
Ratio of total non-performing assets to total loans, leases and other real estate owned	0.73		%	0.83		%	0.49		%
Ratio of non-accrual loans and leases to total loans and leases	0.65		%	0.76		%	0.37		%
Ratio of allowance for credit losses to non-accrual loans and leases	194.18		%	165.41		%	148.37		%

Non-accrual loans and leases at September 30, 2022 were $454 million, a decrease of $59 million from June 30, 2022 and an increase of $333 million since December 31, 2021. Non-accrual loans and leases as a percentage of total loans and leases was 0.65%, 0.76% and 0.37% at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. The increase from December 31, 2021 was primarily driven by the CIT Merger.

OREO at September 30, 2022 totaled $54 million, representing an increase of $9 million from June 30, 2022 and $14 million since December 31, 2021. Non-performing assets as a percentage of total loans, leases and OREO at September 30, 2022 was 0.73% compared to 0.83% at June 30, 2022 and 0.49% at December 31, 2021.

Past Due Accounts

The percentage of loans 30 days or more past due at September 30, 2022 was 0.72% of loans, compared to 0.78% at June 30, 2022 and 0.43% at December 31, 2021. Delinquency status of loans is presented in Note 4 — Loans and Leases.

Troubled Debt Restructurings

We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. TDRs not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans.

The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify accounting and reporting expectations for loan modifications in determining TDR designation for borrowers experiencing COVID-19-related financial difficulty. BancShares applied this regulatory guidance during its TDR identification process for short-term loan forbearance agreements as a result of COVID-19, and in most cases, did not record these as TDRs.

Table 24

Troubled Debt Restructurings


dollars in millions	September 30, 2022						June 30, 2022
	Commercial		Consumer		Total		Commercial		Consumer		Total
Accruing TDRs	$	124	$	51	$	175	$	105	$	49	$	154
Non-accruing TDRs	54		24		78		25		24		49
Total TDRs	$	178	$	75	$	253	$	130	$	73	$	203

							December 31, 2021
Accruing TDRs							$	97	$	49	$	146
Non-accruing TDRs							21		25		46
Total TDRs							$	118	$	74	$	192

Concentration Risk

We aim to maintain a well-diversified loan portfolio and seek to minimize the risks associated with large concentrations within specific geographic areas, collateral types or industries.

Commercial Concentrations

Geographic Concentrations

The following table summarizes state concentrations greater than 5.0% of our loans. Data is based on obligor location unless secured by real estate, then data based on property location.

Table 25

Commercial Loans - Geography


dollars in millions	September 30, 2022				June 30, 2022				December 31, 2021
State
California	$	8,800	16.6	%	$	8,636	16.8	%	$	3,163	14.0	%
North Carolina	8,609		16.3	%	8,639		16.8	%	7,181		31.8	%
Texas	3,486		6.6	%	3,330		6.5	%	879		3.9	%

Florida	3,253		6.1	%	3,156		6.1	%	1,496		6.6	%
South Carolina	3,016		5.7	%	2,989		5.8	%	2,855		12.6	%
All other states	24,431		46.1	%	23,217		45.1	%	7,012		31.1	%
Total U.S.	$	51,595	97.4	%	$	49,967	97.1	%	$	22,586	100.0	%




Total International	1,365		2.6	%	1,510		2.9	%	—		—	%
Total	$	52,960	100.0	%	$	51,477	100.0	%	$	22,586	100.0	%

Industry Concentrations

The following table represents loans by industry of obligor:

Table 26

Commercial Loans - Industry


dollars in millions	September 30, 2022				June 30, 2022				December 31, 2021
Real Estate	$	11,427	21.6	%	$	10,968	21.3	%	$	4,279	18.9	%
Healthcare	7,985		15.1	%	7,817		15.2	%	6,997		31.0	%
Business Services	5,372		10.1	%	5,150		10.0	%	2,307		10.2	%
Transportation, Communication, Gas, Utilities	4,938		9.3	%	4,828		9.4	%	774		3.4	%

Manufacturing	4,342		8.2	%	4,539		8.8	%	1,347		6.0	%
Service Industries	4,087		7.7	%	3,986		7.7	%	722		3.2	%

Retail	3,693		7.0	%	3,355		6.5	%	1,301		5.8	%
Wholesale	2,572		4.9	%	2,485		4.8	%	882		3.9	%
Finance and Insurance	2,569		4.8	%	2,549		5.0	%	1,361		6.0	%



Other	5,975		11.3	%	5,800		11.3	%	2,616		11.6	%
Total	$	52,960	100.0	%	$	51,477	100.0	%	$	22,586	100.0	%

Consumer Concentrations

Loan concentrations may exist when multiple borrowers could be similarly impacted by economic or other conditions. The following table summarizes state concentrations greater than 5.0% based on property address.

Table 27

Consumer Loans - Geography


dollars in millions	September 30, 2022				June 30, 2022				December 31, 2021
	Net Investment		% of Total		Net Investment		% of Total		Net Investment		% of Total
State
North Carolina	$	5,515	32.8	%	$	5,266	32.4	%	$	4,931	50.4	%
California	3,936		23.4	%	3,796		23.4	%	161		1.6	%
South Carolina	2,903		17.2	%	2,786		17.1	%	2,626		26.9	%



Other states	4,476		26.6	%	4,410		27.1	%	2,068		21.1	%
Total	$	16,830	100.0	%	$	16,258	100.0	%	$	9,786	100.0	%

Counterparty Risk

We enter into interest rate derivatives and foreign exchange forward contracts as part of our overall risk management practices and also on behalf of our clients. We establish risk metrics and evaluate and manage the counterparty risk associated with these derivative instruments in accordance with the comprehensive Risk Management Framework and Risk Appetite Framework.

Counterparty credit exposure or counterparty risk is a primary risk of derivative instruments, relating to the ability of a counterparty to perform its financial obligations under the derivative contract. We seek to control credit risk of derivative agreements through counterparty credit approvals, pre-established exposure limits and monitoring procedures, which are integrated with our cash and issuer related credit processes.

The Chief Credit Officer, or delegate, approves each counterparty and establishes exposure limits based on credit analysis of each counterparty. Derivative agreements for BancShares’ risk management purposes and for the hedging of client transactions are executed with major financial institutions and are settled through the major clearing exchanges, which are rated investment grade by nationally recognized statistical rating agencies. Credit exposure is mitigated via the exchange of collateral between the counterparties covering mark-to-market valuations. Client related derivative transactions, which are primarily related to lending activities, are incorporated into our loan underwriting and reporting processes.

ASSET RISK

Asset risk is a form of price risk and is a primary risk of our leasing businesses related to the risk to earning of capital arising from changes in the value of owned leasing equipment. Reflecting the addition of operating lease equipment and additional asset-based lending from the CIT Merger, we are subject to increased asset risk. Asset risk in our leasing business is evaluated and managed in the divisions and overseen by risk management processes. In our asset-based lending business, we also use residual value guarantees to mitigate or partially mitigate exposure to end of lease residual value exposure on certain of our finance leases. Our business process consists of: (1) setting residual values at transaction inception, (2) systematic periodic residual value reviews, and (3) monitoring levels of residual realizations. Residual realizations, by business and product, are reviewed as part of the quarterly financial and asset quality review. Reviews for impairment are performed at least annually.

In combination with other risk management and monitoring practices, asset risk is monitored through reviews of the equipment markets including utilization rates and traffic flows, the evaluation of supply and demand dynamics, the impact of new technologies and changes in regulatory requirements on different types of equipment. At a high level, demand for equipment is correlated with GDP growth trends for the markets the equipment serves, as well as the more immediate conditions of those markets. Cyclicality in the economy and shifts in trade flows due to specific events represent risks to the earnings that can be realized by these businesses. For instance, in the Rail business, BancShares seeks to mitigate these risks by maintaining a relatively young fleet of assets, which can bolster attractive lease and utilization rates.

MARKET RISK

Interest rate risk management

BancShares is exposed to the risk that changes in market conditions or government policy may affect interest rates and negatively impact earnings. The risk arises from the nature of BancShares’ business activities, the composition of BancShares’ balance sheet, and changes in the level or shape of the yield curve. BancShares manages this inherent risk strategically based on prescribed guidelines and approved limits.

Interest rate risk can arise from many of the BancShares’ business activities, such as lending, leasing, investing, deposit taking, derivatives, and funding activities. We evaluate and monitor interest rate risk primarily through two metrics.

•Net Interest Income Sensitivity (“NII Sensitivity”) measures the net impact of hypothetical changes in interest rates on forecasted NII; and

•Economic Value of Equity Sensitivity (“EVE Sensitivity”) measures the net impact of these hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments.

BancShares uses a holistic process to measure and monitor both short term and long term risks which includes, but is not limited to, gradual and immediate parallel rate shocks, changes in the shape of the yield curve, and changes in the relationship of various yield curves. NII Sensitivity generally focuses on shorter term earnings risk, while EVE Sensitivity assesses the longer-term risk of the existing balance sheet.

Our exposure to NII Sensitivity is guided by the Risk Appetite Framework and a range of risk metrics and BancShares may utilize tools across the balance sheet to adjust its interest rate risk exposures, including through business line actions and actions within the investment, funding and derivative activities.

The composition of our interest rate sensitive assets and liabilities generally results in a net asset-sensitive position for NII Sensitivity, whereby our assets will reprice faster than our liabilities, which is generally concentrated at the short end of the yield curve.

Our funding sources consist primarily of non-maturity deposits and time deposits. We also support our funding needs through wholesale funding sources (including unsecured and secured borrowings).

The deposit rates we offer are influenced by market conditions and competitive factors. Market rates are the key drivers of deposit costs and we continue to optimize deposit costs by improving our deposit mix. Changes in interest rates, expected funding needs, as well as actions by competitors, can affect our deposit taking activities and deposit pricing. We believe our targeted non-maturity deposit customer retention is strong and we remain focused on optimizing our mix of deposits. We regularly assess the effect of deposit rate changes on our balances and seek to achieve optimal alignment between assets and liabilities.

Table 28 below summarizes the results of 12-month NII Sensitivity simulations produced our asset/liability management system. These simulations assume static balance sheet replacement with like products and implied forward market rates, but also incorporates additional assumptions, such as, but not limited to prepayment estimates, pricing estimates and deposit behaviors. The below simulations assume an immediate 25, 100 and 200 bps parallel increase and 25 and 100 bps decrease from the market-based forward curve for September 30, 2022, June 30, 2022, and December 2021.

Table 28

Net Interest Income Sensitivity Simulation Analysis


	Estimated (Decrease) Increase in NII
Change in interest rate (bps)	September 30, 2022		June 30, 2022		December 31, 2021
-100	(3.63)	%	(5.34)	%	(5.77)	%
-25	(0.80)	%	(1.25)	%	(1.15)	%
+25	0.91	%	1.34	%	1.05	%
+100	3.44	%	5.17	%	3.21	%
+200	6.81	%	10.20	%	6.30	%

NII Sensitivity metrics at September 30, 2022, compared to June 30, 2022, were primarily affected by a reduction in cash as well as liability management actions which included borrowing FHLB advances to support loan growth and to offset deposit runoff. BancShares continues to have an asset sensitive interest rate risk profile and the potential exposure to forecasted earnings is largely driven by the composition of the balance sheet (primarily due to floating rate commercial loans and cash), as well as estimates of modest future deposit betas. Approximately 45% of our loans have floating contractual reference rates, indexed primarily to 1-month London Inter-Bank Offered Rate (“LIBOR”), 3-month LIBOR, Prime and Secured Overnight Financing Rate (“SOFR”). Deposit betas for the combined company are modeled to have a portfolio average of approximately 20%-25% over the forecast horizon. Impacts to NII Sensitivity may change due to actual results differing from modeled expectations.

As noted above, EVE Sensitivity supplements NII simulations as it estimates risk exposures beyond a twelve-month horizon. EVE Sensitivity measures the change in value of the economic value of equity driven by changes in assets, liabilities, and off-balance sheet instruments in response to a change in interest rates. EVE Sensitivity is calculated by estimating the change in the net present value of assets, liabilities, and off-balance sheet items under various rate movements.

Table 29 presents the EVE profile as of September 30, 2022, June 30, 2022, and December 31, 2021.

Table 29

Economic Value of Equity Modeling Analysis


	Estimated (Decrease) Increase in EVE
Change in interest rate (bps)	September 30, 2022		June 30, 2022		December 31, 2021
-100	(5.39)	%	(7.17)	%	(13.68)	%
-25	(1.21)	%	(1.67)	%	—	%
+100	4.29	%	5.92	%	6.10	%
+200	3.54	%	7.21	%	5.93	%

The economic value of equity metrics at September 30, 2022 compared to June 30, 2022 were primarily affected by balance sheet composition changes as well as increasing market interest rates.

In addition to the above reported sensitivities, a wide variety of potential interest rate scenarios are simulated within our asset/liability management system. Scenarios that impact management volumes, specific risk events, or the sensitivity to key assumptions are also evaluated.

We use results of our various interest rate risk analyses to formulate and implement asset and liability management strategies, in coordination with the Asset Liability Committee, to achieve the desired risk profile, while managing our objectives for market risk and other strategic objectives. Specifically, we may manage our interest rate risk position through certain pricing strategies and product design for loans and deposits, our investment portfolio, funding portfolio, or by using off balance sheet derivatives to mitigate earnings volatility.

The above sensitivities provide an estimate of our interest rate sensitivity; however, they do not account for potential changes in credit quality, size, mix, or changes in the competition for business in the industries we serve. They also do not account for other business developments and other actions. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, the range of such simulations is not intended to represent our current view of the expected range of future interest rate movements.

Table 30 provides loan maturity distribution information.

Table 30

Loan Maturity Distribution


dollars in millions	At September 30, 2022, Maturing
	Within One Year		One to Five Years		Five to 15 Years		After 15 Years		Total
Commercial
Commercial construction	$	578	$	1,316	$	753	$	105	$	2,752
Owner occupied commercial mortgage	630		3,903		9,068		452		14,053
Non-owner occupied commercial mortgage	2,005		5,370		2,059		249		9,683
Commercial and industrial	7,136		13,359		3,618		175		24,288
Leases	759		1,370		55		—		2,184
Total commercial	$	11,108	$	25,318	$	15,553	$	981	$	52,960
Consumer
Residential mortgage	268		1,088		3,599		7,955		12,910
Revolving mortgage	89		164		77		1,593		1,923
Consumer auto	10		673		702		—		1,385
Consumer other	302		157		115		38		612
Total consumer	$	669	$	2,082	$	4,493	$	9,586	$	16,830
Total loans and leases	$	11,777	$	27,400	$	20,046	$	10,567	$	69,790

Table 31 provides information regarding the sensitivity of loans and leases to changes in interest rates.

Table 31

Loan Interest Rate Sensitivity


dollars in millions	Loans Maturing One Year or After with
	Fixed Interest Rates		Variable Interest Rates
Commercial
Commercial construction	$	958	$	1,216
Owner occupied commercial mortgage	11,913		1,510
Non-owner occupied commercial mortgage	2,929		4,749
Commercial and industrial	7,546		9,606
Leases	1,425		—
Total commercial	$	24,771	$	17,081
Consumer
Residential mortgage	7,303		5,339
Revolving mortgage	38		1,796
Consumer auto	1,375		—
Consumer other	272		38
Total consumer	$	8,988	$	7,173
Total loans and leases	$	33,759	$	24,254

Reference Rate Reform

The administrator of LIBOR has announced that publication of the most commonly used tenors of U.S. Dollar LIBOR will cease to be provided or cease to be representative after June 30, 2023. The U.S. federal banking agencies had also issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in “new” contracts by December 31, 2021 at the latest. Accordingly, prior to the CIT Merger, FCB and CIT had ceased originating new products using LIBOR by the end of 2021.

In April 2018, the FRB of New York commenced publication of SOFR, which has been recommended as an alternative to U.S. Dollar LIBOR by the Alternative Reference Rates Committee, a group of market and official sector participants. On March 15, 2022, the U.S. Congress adopted, as part of the Consolidated Appropriation Act of 2022, the Adjustable Interest (LIBOR) Act, which provides certain statutory requirements and guidance for the selection and use of alternative reference rates in legacy financial contracts governed by U.S. law that do not provide for the use of a clearly defined or practicable alternative reference rate. On July 19, 2022, the Board of Governors of the Federal Reserve System issued a notice of proposed rulemaking on a proposed regulation to implement the LIBOR Act, as required by its terms. The LIBOR Act requires implementing regulations be in place within 180 days of its enactment. BancShares anticipates using the safe harbors that are expected in the final regulations.

BancShares holds instruments such as loans, investments, derivative products, and other financial instruments that use LIBOR as a benchmark rate. However, BancShares’ LIBOR exposure is primarily to tenures other than one week and two-month USD LIBOR.

LIBOR is a benchmark interest rate for most of our floating rate loans and our Series B Preferred Stock, as well as certain liabilities and off-balance sheet exposures. We continue to monitor industry and regulatory developments and have a well-established transition program in place to manage the implementation of alternative reference rates as the market transitions away from LIBOR. Coordination is being handled by a cross-functional project team governed by executive sponsors. Its mission is to work with our businesses to ensure a smooth transition for BancShares and its customers to an appropriate LIBOR alternative. Certain financial markets and products have already migrated to alternatives. The project team ensures that BancShares is ready to move quickly and efficiently as consensus around LIBOR alternatives emerge. BancShares has processes in place to complete its review of the population of legal contracts impacted by the LIBOR transition, and updates to our operational systems and processes are substantially in place.

BancShares is utilizing SOFR as our preferred replacement index for LIBOR. However, we are positioned to accommodate other alternative reference rates (e.g., credit sensitive rates) in response to how the market evolves.

For a further discussion of risks BancShares faces in connection with the replacement of LIBOR on its operations, see “Risk Factors—Market Risks—We may be adversely impacted by the transition from LIBOR as a reference rate.” in Item 1A. Risk Factors of our 2021 Form 10-K.

LIQUIDITY RISK

Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash and collateral resources and funding capacity to meet our obligations. Our overall liquidity management strategy is intended to ensure appropriate liquidity to meet expected and contingent funding needs under both normal and stressed environments. Consistent with this strategy, we maintain sufficient amounts of Available Cash and High Quality Liquid Securities (“HQLS”). Additional sources of liquidity include FHLB borrowing capacity, committed credit facilities, repurchase agreements, brokered CD issuances, unsecured debt issuances, and cash collections generated by portfolio asset sales to third parties.

We utilize a series of measurement tools to assess and monitor the level and adequacy of our liquidity position, liquidity conditions and trends. We measure and forecast liquidity and liquidity risks under different hypothetical scenarios and across different horizons. We use a liquidity stress testing framework to better understand the range of potential risks and their impacts to which BancShares is exposed. Stress test results inform our business strategy, risk appetite, levels of liquid assets, and contingency funding plans. Also included among our liquidity measurement tools are key risk indicators that assist in identifying potential liquidity risk and stress events.

BancShares maintains a framework to establish liquidity risk tolerances, monitoring, and breach escalation protocol to alert management of potential funding and liquidity risks and to initiate mitigating actions as appropriate. Further, BancShares maintains a contingent funding plan which details protocols and potential actions to be taken under liquidity stress conditions.

Liquidity includes Available Cash and HQLS. At September 30, 2022 we had $19.2 billion of total Liquid Assets (17.5% of total assets) and $11.7 billion of contingent liquidity sources available.

Table 32

Liquidity


dollars in millions	September 30, 2022
Available Cash	$	6,050
High Quality Liquid Securities	13,111
Liquid Assets	$	19,161

FHLB capacity(1)	$	7,140
FRB capacity	4,464
Line of credit with bank	100
Total contingent sources	$	11,704
Total Liquid Assets and contingent sources	$	30,865

(1) See Table 33 for additional details.

We fund our operations through deposits and borrowings. Our primary source of liquidity is our branch-generated deposit portfolio due to the generally stable balances and low cost. Deposits totaled $87.6 billion, $89.3 billion and $51.4 billion at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. As needed, we use borrowings to diversify the funding of our business operations. Borrowings totaled $8.3 billion, $4.5 billion and $1.8 billion at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. Borrowings primarily consist of FHLB advances, senior unsecured notes, securities sold under customer repurchase agreements, and subordinated notes.

A source of available funds is advances from the FHLB of Atlanta. We may pledge assets for secured borrowing transactions, which include borrowings from the FHLB and/or FRB, or for other purposes as required or permitted by law. The debt issued in conjunction with these transactions is collateralized by certain discrete receivables, securities, loans, leases and/or underlying equipment. Certain related cash balances are restricted.

FHLB Advances

Table 33

FHLB Balances


dollars in millions	September 30, 2022			June 30, 2022			December 31, 2021
	Total			Total			Total
Total borrowing capacity	$	14,390		$	14,097		$	9,564
Less:
Advances	5,800			1,785			645
Letter of credit(1)	1,450			750			—
Available capacity	$	7,140		$	11,562		$	8,919
Pledged non-PCD loans (contractual balance)	$	21,093		$	20,680		$	14,507
Weighted Average Rate	3.14		%	1.88		%	1.28		%

(1) A letter of credit was established with the FHLB to collateralize public funds.

The increase in advances from June 30, 2022 primarily reflected third quarter FHLB borrowings of $4.5 billion, partially offset by repayments of $0.5 billion, and in June 2022, we had borrowed $1.65 billion. We do not expect FHLB advances to grow materially as a percentage of total funding as our long-term strategy is to rely on deposits as our core funding source.

Under borrowing arrangements with the FRB of Richmond, FCB has access to an additional $4.5 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at September 30, 2022, June 30, 2022, and December 31, 2021.

Commitments and Contractual Obligations

Table 34 identifies significant obligations and commitments as of September 30, 2022, representing required and potential cash outflows. See Note 23 — Commitments and Contingencies for additional information regarding commitments. Financing commitments, letters of credit and deferred purchase commitments are presented at contractual amounts and do not necessarily reflect future cash outflows as many are expected to expire unused or partially used.

Table 34

Commitments and Contractual Obligations


dollars in millions	Payments Due by Period
Type of Obligation	Less than 1 year		1-3 years		4-5 years		Thereafter		Total
Contractual obligations:
Time deposits	$	6,178	$	1,872	$	136	$	122	$	8,308
Short-term borrowings	3,128		—		—		—		3,128
Long-term obligations	19		4,117		35		1,044		5,215
Total contractual obligations	$	9,325	$	5,989	$	171	$	1,166	$	16,651
Commitments:
Financing commitments	$	12,050	$	4,197	$	2,693	$	4,433	$	23,373
Letters of credit	166		175		91		27		459
Deferred purchase agreements	2,152		—		—		—		2,152
Purchase and funding commitments	914		8		—		—		922
Affordable housing partnerships(1)	117		104		32		11		264
Total commitments	$	15,399	$	4,484	$	2,816	$	4,471	$	27,170

(1) On-balance sheet commitments, included in other liabilities.

CAPITAL

Capital requirements applicable to BancShares are discussed in Item 1. Business — Regulation, subsections “Regulatory Considerations” of our 2021 Form 10-K.

BancShares maintains a comprehensive capital adequacy process. BancShares establishes internal capital risk limits and warning thresholds, which utilize Risk-Based and Leverage-Based Capital calculations, internal and external early warning indicators, its capital planning process, and stress testing to evaluate BancShares' capital adequacy for multiple types of risk in both normal and stressed environments. The capital management framework requires contingency plans be defined and may be employed at management’s discretion.

Share Repurchase Program

On July 26, 2022, the Board authorized a share repurchase program for up to 1,500,000 shares of BancShares’ Class A Common Stock for the period commencing August 1, 2022 through July 28, 2023. Under the authorized share repurchase program, shares of BancShares’ Class A Common Stock were authorized to be repurchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan. During the three months ended September 30, 2022, we purchased 1,027,414 shares of Class A Common Stock, and subsequent to September 30, 2022, we purchased an additional 472,586 shares of Class A Common Stock, thereby completing the share repurchase program. See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Quarterly Report on Form 10-Q for further details on purchases.

Common and Preferred Stock Dividends

On October 25, 2022, our Board of Directors declared a quarterly dividend increase on the Class A Common Stock and Class B Common Stock to $0.75 per common share from $0.47 per common share. The dividends are payable on December 15, 2022 to shareholders of record as of November 30, 2022.

On October 25, 2022, our Board of Directors also declared dividends on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. The dividends are payable on December 15, 2022 to shareholders of record as of November 30, 2022. Dividend payment information on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is disclosed in Note 16 — Stockholders’ Equity.

Capital Composition and Ratios

In connection with the consummation of the CIT Merger, the Parent Company issued approximately 6.1 million shares of its Class A Common Stock. Additionally, shares of CIT Series A Preferred Stock and CIT Series B Preferred Stock were automatically converted into the right to receive shares of BancShares Series B Preferred Stock and BancShares Series C Preferred Stock, respectively. In connection with the consummation of the CIT Merger, the Parent Company issued (a) 325,000 shares of BancShares Series B Preferred Stock with a liquidation preference of $1,000 per share, resulting in a total liquidation preference of $325 million, and (b) 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of $25 per share, resulting in a total liquidation preference of $200 million.

The table below shows activities that caused the change in outstanding Class A Common Stock for the quarter.

Table 35

Changes in Shares of Class A Common Stock Outstanding


	Three Months Ended September 30, 2022	Nine Months Ended September 30, 2022
Class A shares outstanding at beginning of period	14,997,202	8,811,220
Share issuance in conjunction with the CIT Merger	—	6,140,010
Restricted stock units vested, net of shares held to cover taxes	1,156	47,128
Shares purchased under authorized repurchase plan	(1,027,414)	(1,027,414)
Class A shares outstanding at end of period	13,970,944	13,970,944

We also had 1,005,185 Class B Common Stock outstanding at September 30, 2022, June 30, 2022 and December 31, 2021.

We are committed to effectively managing our capital to protect our depositors, creditors and stockholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.

In accordance with GAAP, the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within stockholders’ equity. These amounts are excluded from regulatory in the calculation of our regulatory capital ratios under current regulatory guidelines.

Table 36

Analysis of Capital Adequacy


dollars in millions	Requirements to be Well-Capitalized		September 30, 2022				June 30, 2022				December 31, 2021
			Amount		Ratio		Amount		Ratio		Amount		Ratio
BancShares
Risk-based capital ratios
Total risk-based capital	10.00	%	$	11,927	13.46	%	$	12,396	14.46	%	$	5,042	14.35	%
Tier 1 risk-based capital	8.00	%	10,066		11.36	%	10,605		12.37	%	4,380		12.47	%
Common equity Tier 1	6.50	%	9,185		10.37	%	9,724		11.35	%	4,041		11.50	%
Tier 1 leverage ratio	5.00	%	10,066		9.31	%	10,605		9.85	%	4,380		7.59	%

FCB
Risk-based capital ratios
Total risk-based capital	10.00	%	$	11,732	13.26	%	$	12,233	14.28	%	$	4,858	13.85	%
Tier 1 risk-based capital	8.00	%	10,327		11.67	%	10,899		12.73	%	4,651		13.26	%
Common equity Tier 1	6.50	%	10,327		11.67	%	10,899		12.73	%	4,651		13.26	%
Tier 1 leverage ratio	5.00	%	10,327		9.56	%	10,899		10.14	%	4,651		8.07	%

As of September 30, 2022, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. At September 30, 2022, BancShares and FCB had risk-based capital ratio conservation buffers of 5.36% and 5.26%, respectively, which are in excess of the fully phased in Basel III conservation buffer of 2.50%. At December 31, 2021, BancShares and FCB had risk-based capital ratio conservation buffers were 6.35% and 5.85%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratio over the Basel III minimum. Additional Tier 1 capital for BancShares includes perpetual preferred stock. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt.

CRITICAL ACCOUNTING ESTIMATES

Accounting policies related to the ACL are considered critical accounting estimates as described in our 2021 Form 10-K. The ACL as of September 30, 2022 is discussed in Note 5 — Allowance for Credit Losses and the Credit Risk discussion in the section entitled “Risk Management” above.

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Fair values of loans acquired in and the core deposit intangibles associated with the CIT Merger are considered critical accounting estimates. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the merger and other future events that are highly subjective in nature and may require adjustments. The fair values for these items are further discussed in Note 2 — Business Combinations.

RECENT ACCOUNTING PRONOUNCEMENTS

The following accounting pronouncements were issued by the FASB but are not yet effective for BancShares.


Standard	Summary of Guidance	Effect on BancShares’ Financial Statements
ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020 ASU 2021-01 - Reference Rate Reform (Topic 848): Scope Issued January 2021	The amendments in these updates apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Allows entities to prospectively apply certain optional expedients for contract modifications and removes the requirements to remeasure contract modifications or de-designate hedging relationships. In addition, potential sources of ineffectiveness as a result of reference rate reform may be disregarded when performing certain effectiveness assessments. ASU 2021-01 refines the scope of ASC 848 and clarifies which optional expedients may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified in connection with the market-wide transition to new reference rates. Guidance in these ASUs are effective as of March 12, 2020 through December 31, 2022.	The amendments are effective for all entities at issuance date of March 12, 2020, and once adopted will apply to contract modifications made and hedging relationships entered into on or before December 31, 2022. BancShares is in the process of evaluating the optional expedients as applicable for eligible contract modifications and any hedge relationships. However, we do not expect the guidance to have a material impact on the financial statements.
ASU 2022-01, Fair Value Hedging - Portfolio Layer Method Issued March 2022	The amendments in this Update allow entities to designate multiple hedged layers of a single closed portfolio, and expands the scope of the portfolio layer method to include non-prepayable financial assets. Provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method. In addition, as of the adoption date the Update permits reclassification of debt securities from the held-to-maturity category to the available-for-sale category if the entity intends to include those securities in a portfolio designated in a portfolio layer method hedge. Also provides 30 days post adoption to reclassify securities and include them in a hedged closed portfolio.	Effective for BancShares as of January 1, 2023. Early adoption is permitted. The guidance on hedging multiple layers in a closed portfolio is applied prospectively. The guidance on the accounting for fair value basis adjustments is applied on a modified retrospective basis. BancShares is currently evaluating timing of adoption of this guidance and the impact of the guidance on its consolidated financial statements and disclosures.

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ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures Issued March 2022			The amendments in this ASU eliminate the recognition and measurement guidance for TDRs for creditors that have adopted the CECL model and enhances disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. The guidance also requires disclosure of current-period gross write-offs by year of origination in the vintage disclosure.			Effective for BancShares as of January 1, 2023. Early adoption is permitted. Provides the option to early adopt the amendments related to TDRs separately from the amendments related to vintage disclosures. Allows adoption using either a prospective or modified retrospective transition methods. Under prospective method, entities are permitted to apply this guidance to modifications occurring after the first day of the fiscal year of adoption. If the modified retrospective transition method is elected, a cumulative effect adjustment to retained earnings is recorded in the period of adoption to recognize any change in the ACL that had been recognized for receivables previously modified in a TDR. BancShares is currently evaluating the transition methods along with the impact on its consolidated financial statements and disclosures, and plans to adopt the ASU at the effective date.

GLOSSARY OF KEY TERMS

To assist the users of this document, we have added the following Glossary of key terms:

Allowance for Credit Losses (“ACL”) reflects the estimated credit losses over the full remaining expected life of the portfolio. See CECL below.

Assets Held for Sale include loans and operating lease equipment that we no longer have the intent or ability to hold until maturity. As applicable, assets held for sale could also include a component of goodwill associated with portfolios or businesses held for sale.

Available Cash consists of the unrestricted portions of ‘Cash and due from banks’ and ‘Interest-bearing deposits at banks’, excluding cash not accessible for liquidity, such as vault cash and deposits in transit.

Available for sale is a classification that pertains to debt securities. We classify debt securities as available for sale when they are not considered trading securities, securities carried at fair value, or held-to-maturity securities. Available for sale securities are included in investment securities in the balance sheet.

Average Interest-Earning Assets is a measure that is the sum of average loans and leases (as defined below, less the credit balances of factoring clients), loans and leases held for sale, interest-bearing cash, and investment securities. Average interest earning assets is computed using daily balances of Interest-Earning Assets. We use this average for certain key profitability ratios, including NIM (as defined below) for the respective period.

Average Loans and Leases is computed using daily balances and is used to measure the rate of return on loans and leases (finance leases) and the rate of net charge-offs, for the respective period.

Capital Conservation Buffer (“CCB”) is the excess 2.5% of each of the capital tiers that banks are required to hold in accordance with Basel III rules, above the minimum CET 1 Capital, Tier 1 capital and Total capital requirements, designed to absorb losses during periods of economic stress.

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Common Equity Tier 1 ("CET1"), Additional Tier 1 Capital, Tier 1 Capital, Tier 2 Capital, and Total Capital are regulatory capital measures as defined in the capital adequacy guidelines issued by the Federal Reserve. CET1 is common stockholders' equity reduced by capital deductions such as goodwill, intangible assets and DTAs that arise from net operating loss and tax credit carryforwards and adjusted by elements of other comprehensive income and other items. Tier 1 Capital is Common Equity Tier 1 Capital plus other Additional Tier 1 Capital instruments, including non-cumulative preferred stock. Total Capital consists of Tier 1 Capital and Tier 2 Capital, which includes subordinated debt, and qualifying allowance for credit losses and other reserves.

Current Expected Credit Losses (“CECL”) is a forward-looking “expected loss” model used to estimate credit losses over the full remaining expected life of the portfolio. Estimates under the CECL model are based on relevant information about past events, current conditions, and reasonable and supportable forecasts regarding the collectability of reported amounts. Generally, the model requires that an ACL be estimated and recognized for financial assets measured at amortized cost within its scope.

Delinquent Loan categorization occurs when payment is not received when contractually due. Delinquent loan trends are used as a gauge of potential portfolio degradation or improvement.

Derivative Contract is a contract whose value is derived from a specified asset or an index, such as an interest rate. As the value of that asset or index changes, so does the value of the derivative contract.

Economic Value of Equity Sensitivity ("EVE Sensitivity") measures the net impact of hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments.

Finance leases - lessor is an agreement in which the party who owns the property (lessor), which is BancShares as part of our finance business, permits another party (lessee), which is our customer, to use the property with substantially all of the economic benefits and risks of asset ownership passed to the lessee. Finance leases are commonly known as sales-type leases and direct finance leases and are included in the consolidated balance sheet in the line “Loans and leases.”

High Quality Liquid Securities (“HQLS”) consist of readily-marketable, unpledged securities, as well as securities pledged but not drawn against at the FHLB and available for sale, and generally is comprised of Treasury and Agency securities held outright or via reverse repurchase agreements.

Impaired Loan is a loan for which, based on current information and events, it is probable that BancShares will be unable to collect all amounts due according to the contractual terms of the loan.

Interest income includes interest earned on loans, interest-bearing cash balances, debt investments and dividends on investments.

Liquid Assets includes Available Cash and HQLS.

Loans and Leases include loans, finance lease receivables, and factoring receivables, and do not include amounts contained within assets held for sale (unless otherwise noted) or operating leases.

Loan-to-Value Ratio ("LTV") is a calculation of a loan's collateral coverage that is used in underwriting and assessing risk in our lending portfolio. LTV is calculated as the total loan obligations (unpaid principal balance) secured by collateral divided by the fair value of the collateral.

Net Interest Income (“NII”) reflects interest and fees on loans, interest on interest-bearing cash, and interest/dividends on investments less interest expense on deposits and borrowings. When divided by average interest earning assets, the quotient is defined as Net Interest Margin ("NIM").

Net Interest Income Sensitivity ("NII Sensitivity") measures the net impact of hypothetical changes in interest rates on forecasted NII.

Net Operating Loss Carryforward / Carryback ("NOLs") is a tax concept, whereby tax losses in one year can be used to offset taxable income in other years. The rules pertaining to the number of years allowed for the carryback or carryforward of an NOL varies by jurisdiction.

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Non-accrual Loans include loans greater than or equal to $500,000 that are individually evaluated and determined to be impaired, as well as loans less than $500,000 that are delinquent (generally for 90 days or more), unless it is both well secured and in the process of collection. Non-accrual loans also include loans with revenue recognition on a cash basis because of deterioration in the financial position of the borrower.

Non-performing Assets include Non-accrual Loans, OREO, and repossessed assets.

Operating leases - lessor is a lease in which BancShares retains ownership of the asset (operating lease equipment, net), collects rental payments, recognizes depreciation on the asset, and retains the risks of ownership, including obsolescence.

Other Noninterest Income includes (1) fee income and other revenue, (2) wealth management services, (3) gains and losses on leasing equipment, net, (4) Service charges on deposit accounts, (5) factoring commissions, (6) cardholder services, net, (7) merchant services, (8) realized gains and losses on investment securities available for sale, net, (9) marketable equity securities gains and losses, net, (10) gain on acquisition, (11) gain and losses on extinguishments of debt, and (12) other income.

Other Real Estate Owned ("OREO") is a term applied to real estate properties owned by a financial institution and are considered non-performing assets.

Pledged Assets are those required under the collateral maintenance requirement in connection with borrowing availability at the FHLB, which are comprised primarily of consumer and commercial real estate loans and also include certain HQLS that are available for secured funding at the FHLB.

Purchase Accounting Adjustments (“PAA”) reflect the fair value adjustments to acquired assets and liabilities assumed in a business combination.

Purchased Credit Deteriorated (“PCD”) financial assets are acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment.

Regulatory Credit Classifications used by BancShares are as follows:

•Pass — A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification;

•Special Mention — A special mention asset has potential weaknesses which deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification;

•Substandard — A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected;

•Doubtful — An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values; and

•Loss — Assets classified as loss are considered uncollectible and of such little value it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.

Classified assets are rated as substandard, doubtful or loss based on the criteria outlined above. Classified assets can be accruing or on non-accrual depending on the evaluation of the relevant factors. Classified loans plus special mention loans are considered criticized loans.

Residual Values for finance leases represent the estimated value of equipment at the end of its lease term. For operating lease equipment, it is the value to which the asset is depreciated at the end of lease term or at the end of estimated useful life.

Right of Use Asset (“ROU Asset”) represents our right, as lessee, to use underlying assets for the lease term, and lease liabilities represent our obligation to make lease payments arising from the leases.

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Risk Weighted Assets ("RWA") is the denominator to which CET1, Tier 1 Capital and Total Capital is compared to derive the respective risk based regulatory ratios. RWA is comprised of both on-balance sheet assets and certain off-balance sheet items (for example loan commitments, purchase commitments or derivative contracts). RWA items are adjusted by certain risk-weightings as defined by the regulators, which are based upon, among other things, the relative credit risk of the counterparty.

Troubled Debt Restructuring ("TDR") occurs when a lender, for economic or legal reasons, grants a concession to the borrower related to the borrower's financial difficulties that it would not otherwise consider.

Variable Interest Entity ("VIE") is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets. These entities: lack sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; have equity owners who either do not have voting rights or lack the ability to make significant decisions affecting the entity's operations; and/or have equity owners that do not have an obligation to absorb the entity's losses or the right to receive the entity's returns.

Yield-related Fees are collected in connection with our assumption of underwriting risk in certain transactions in addition to interest income. We recognize yield-related origination fees in interest income over the life of the lending transaction and recognize yield-related prepayment fees when the loan is prepaid.

NON-GAAP FINANCIAL MEASUREMENTS

BancShares provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. A non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance or financial position that may either exclude or include amounts or is adjusted in some way to the effect of including or excluding amounts, as compared to the most directly comparable measure calculated and presented in accordance with GAAP financial statements. BancShares believes that non-GAAP financial measures, when reviewed in conjunction with GAAP financial information, can provide transparency about, or an alternate means of assessing, its operating results and financial position to its investors, analysts and management. These non-GAAP measures should be considered in addition to, and not superior to or a substitute for, GAAP measures presented in BancShares’ consolidated financial statements and other publicly filed reports. In addition, our non-GAAP measures may be different from or inconsistent with non-GAAP financial measures used by other institutions.

Whenever we refer to a non-GAAP financial measure we will generally define and present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation between the U.S. GAAP financial measure and the non-GAAP financial measure. We describe each of these measures below and explain why we believe the measure to be useful.

The following table provides a reconciliation of net income (GAAP) to net revenue on operating leases (non-GAAP) for the Rail Segment.

Net Revenue on Operating Leases for Rail Segment

Net revenue on operating leases within the Rail segment is calculated as gross revenue earned on rail car leases less depreciation and maintenance. This metric allows us to monitor the performance and profitability of the rail leases after deducting direct expenses.

The table below presents a reconciliation of net income to net revenue on operating leases.


dollars in millions	Three Months Ended						Nine Months Ended
	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net income (GAAP)	$	30	$	24	$	—	$	87	$	—
Plus: Provision for income taxes	10		8		—		28		—
Plus: Other noninterest expense	15		16		—		47		—
Less: Other noninterest income	6		—		—		8		—
Plus: Interest expense, net	20		18		—		57		—
Net revenue on operating leases (non-GAAP)	$	69	$	66	$	—	$	211	$	—

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Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and future performance of BancShares. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “targets,” “designed,” “could,” “may,” “should,” “will,” “potential,” “continue,” “aims” or other similar words and expressions are intended to identify these forward-looking statements. These forward-looking statements are based on BancShares’ current expectations and assumptions regarding BancShares’ business, the economy, and other future conditions.

Because forward-looking statements relate to future results and occurrences, they are subject to inherent risks, uncertainties, changes in circumstances and other factors that are difficult to predict. Many possible events or factors could affect BancShares’ future financial results and performance and could cause the actual results, performance or achievements of BancShares to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, general competitive, economic, political, geopolitical events (including the military conflict between Russia and Ukraine) and market conditions, the impacts of the global COVID-19 pandemic on BancShares’ business, and customers, the financial success or changing conditions or strategies of BancShares’ customers or vendors, fluctuations in interest rates, rising inflation, actions of government regulators, including the recent and projected interest rate hikes by the Board of Governors of the Federal Reserve Board (the “Federal Reserve”), the potential impact of decisions by the Federal Reserve on BancShares’ capital plans, adverse developments with respect to U.S. or global economic conditions, including the significant turbulence in the capital or financial markets, the impact of the current inflationary environment, the impact of implementation and compliance with current or proposed laws, regulations and regulatory interpretations, regulators, the availability of capital and personnel, the failure to realize the anticipated benefits of BancShares’ previously announced acquisition transaction(s), including the recently-completed transaction with CIT, which acquisition risks include (1) disruption from the transaction, or recently completed mergers, with customer, supplier or employee relationships, (2) the possibility that the amount of the costs, fees, expenses and charges related to the transaction may be greater than anticipated, including as a result of unexpected or unknown factors, events or liabilities, (3) reputational risk and the reaction of the parties’ customers to the transaction, (4) the risk that the cost savings and any revenue synergies from the transaction may not be realized or take longer than anticipated to be realized, and (5) difficulties experienced in the integration of the businesses.

Except to the extent required by applicable law or regulation, BancShares disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional factors which could affect the forward-looking statements can be found in the 2021 Form 10-K and its other filings with the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced NII in future periods. As of September 30, 2022, BancShares’ market risk profile has changed since December 31, 2021, primarily due to the CIT Merger. See Risk Management within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of changes. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

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Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision of and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), as of September 30, 2022. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports we file under the Exchange Act.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

We review our internal controls over financial reporting on an ongoing basis and make changes intended to ensure the quality of our financial reporting. During the first quarter of 2022, as the result of the acquisition of CIT, we commenced the evaluation of the acquired entities controls, and designed and implemented new controls as needed. The evaluation of the changes to processes, information technology systems and other components of internal control over financial reporting related to our acquisition of CIT is ongoing. Otherwise, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, BancShares’ internal control over financial reporting.

Part II

Item 1. Legal Proceedings

The Parent Company and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts were claimed. Although the amount of any ultimate liability with respect to those matters cannot be determined, in the opinion of management, no legal actions currently exist that are expected to have a material effect on BancShares’ consolidated financial statements. Additional information relating to legal proceedings is set forth in Note 23 — Commitments and Contingencies, which is incorporated by reference into this item.

Item 1A. Risk Factors

There have been no material changes in the risk factors during 2022 from those reported in our 2021 Form 10-K, which had contemplated anticipated changes due to the CIT Merger. For a discussion of the risks and uncertainties that management believes are material to an investment in us, see Part I, Item 1A. Risk Factors, of our 2021 Form 10-K, and Forward-Looking Statements of this Quarterly Report on Form 10-Q. Additional risks and uncertainties that are not currently known to management or that management does not currently deem material could also have a material adverse impact on our financial condition, the results of our operations or our business. If such risks and uncertainties were to materialize or the likelihoods of the risks were to increase, we could be adversely affected, and the market price of our securities could significantly decline.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES


Class A Common Stock	Total Number of Class A Shares Repurchased	Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plan	Maximum Number of Shares that May Yet be Repurchased Under Plan
Repurchases from July 1 - 31, 2022	—	$	—	—	1,500,000
Repurchases from August 1 - 31, 2022	487,284	$	820.11	487,284	1,012,716
Repurchases from September 1 - 30, 2022	540,130	$	819.53	540,130	472,586
Total	1,027,414	$	819.80	1,027,414	472,586

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On July 26, 2022, the Board authorized a share repurchase program for up to 1,500,000 shares of Class A Common Stock for the period commencing August 1, 2022 through July 28, 2023. Under the authorized share repurchase program, shares of Class A Common Stock were authorized to be repurchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan. During the three months ended September 30, 2022, BancShares purchased 1,027,414 shares of Class A Common Stock, and subsequent to September 30, 2022, BancShares purchased an additional 472,586 shares of Class A Common Stock, thereby completing the share repurchase program.

Item 5. Other Information

COMPLETION OF SHARE REPURCHASE PROGRAM

Subsequent to September 30, 2022, BancShares purchased an additional 472,586 shares of Class A Common Stock, thereby completing the share repurchase program. Refer to Part II, Item 2 Unregistered Sales of Equity Securities and Use of Proceeds above for additional information.

Item 6. Exhibits


31.1						Certification of Chief Executive Officer (filed herewith)
31.2						Certification of Chief Financial Officer (filed herewith)
32.1						Certification of Chief Executive Officer (filed herewith)
32.2						Certification of Chief Financial Officer (filed herewith)
*101.INS						Inline XBRL Instance Document (filed herewith)
*101.SCH						Inline XBRL Taxonomy Extension Schema (filed herewith)
*101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
*101.LAB						Inline XBRL Taxonomy Extension Label Linkbase (filed herewith)
*101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith)
*101.DEF						Inline XBRL Taxonomy Definition Linkbase (filed herewith)
*104						Cover Page Interactive Data File (embedded within the Inline XBRL document filed as Exhibit 101)
*						Interactive data files are furnished but not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:

November 4, 2022

FIRST CITIZENS BANCSHARES, INC.

(Registrant)

By:

/s/ Craig L. Nix

Craig L. Nix

Chief Financial Officer

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